5 Ways Having a Paid Off Car Is Surprisingly Great

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In 2005, I awoke one fine spring morning to the sound of metal crunching. Looking out the window, I saw a box truck mowing down my 1994 Honda Civic, which was parked on the street in front of my house. The driver was a 13-year-old boy who had come across the idling truck and had decided to steal it and go for a joy ride — which ended with the destruction of my car.

It was not a great day.

However, as overwhelming as it was for me to watch my car get hit by an uninsured driver, the entire situation was much better than it could have been because of one important fact: My Civic was paid off.

As a matter of fact, I have been fortunate enough to never have a car payment in my 21 years of car ownership. While I'm delighted to not have a payment due every month, that's not the only way that having a paid-off car makes my life better. Here are five ways that having a paid-off car will benefit your life:

1. Insurance and Accidents Cost You Less

At the time of its sad demise, my Honda Civic was an 11-year-old car with 120,000 miles on it. I carried liability, uninsured motorist, and collision coverage. The first two were required by the state I lived in, and my collision coverage costs were fairly inexpensive because of the relatively low value of my car. The amount of money I was paying for insurance was a great deal lower than that of a classmate whose car was also totaled by another driver around the same time.

The difference was that my classmate was driving a new car with a hefty car payment, so she had to have an expensive comprehensive insurance policy to match.

What's more, I felt like I was made whole by my cheaper insurance, while my classmate was not. After my car was totaled, I got a check from my insurance company for the value of the car minus my $500 deductible, which I used to buy another used car. My friend was forced to take on another loan with a monthly payment that was $30 higher than the one she had before the accident.

2. Having a Paid-Off Car Means Potentially Never Paying Interest Again

One of the smartest things my husband and I have ever done was starting a "car fund" savings account. Each month, we set aside $350 into the account so that we have money available to either fix our cars if they need maintenance or repair, or to pay cash for a new one if our vehicles ends up going to the big garage in the sky. We pay ourselves the equivalent of a car payment each month so we never have to pay interest on our cars — and we earn some interest on the money we've saved, too.

3. Financial Ups and Downs Are Less Stressful

Making a monthly car payment is no biggie when your job feels secure. But if you are still making monthly payments on your car when you lose your job, receive an unexpected bill, or otherwise see your personal finances go south, then that monthly payment can feel more like an albatross around your neck.

This is especially true if you have any reason to fear repossession of your car during your financial turmoil. Owning your car free and clear means that you have one less worry while you are trying to get your financial house back in order. You know that you can still rely on your car to transport you to and from work and your other responsibilities.

4. You Don't Have to Worry About Weird Hits to Your Credit

One of the bizarre aspects of how credit scores are calculated is the fact that paying off a major loan — such as a car loan — can have the effect of lowering your credit score. That's because paying off an installment loan raises your utilization ratio. For example, if you have a $12,000 car loan with a $3,000 balance that you pay off all at once, your available credit will drop by $12,000 once the account is closed, even though your debt load will also drop by $3,000.

I don't know about you, but that kind of convoluted credit logic makes my head spin. It's a lot simpler to just have a car that's paid off — and have your credit score based on things like your mortgage or rental history, and your utilities payments.

5. It's Better for the Environment

Wanting to avoid ever having a car payment means that I strive to take great care of my cars. My current vehicle is a 14-year-old Honda Accord that could probably last another 14 years if I am diligent about maintenance.

While it's possible that car manufacturers will figure out a way for all new cars to get 50 miles per gallon before the year 2030, keeping my current car on the road for as long as possible will be better for the environment than trading it in for a more efficient one. That's because the environmental impact of manufacturing a new car and disposing of a used one offsets a great deal of the fuel efficiency I might gain by buying a new car.

The Bottom Line

Having a paid off car offers a great deal of freedom and peace of mind, whether your car provides you with years of faithful service, or it's totaled in an unfortunate joy-riding incident.

Is your car paid off? What's great about it?