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You may be entitled to a gap insurance refund after refinancing your car loan. That’s because refinancing closes the gap and pays off your original car loan. This means auto loan borrowers who’ve paid for gap insurance in full can refinance the car loan and demand a prorated refund for unused gap insurance premium. We further explain how this works below.What is Gap Insurance and How Does It Work?
Gap insurance is a type of supplemental auto insurance. It can kick in if the vehicle you own is stolen or totaled before your car loan is paid off. The insurance then covers the difference between what your auto insurance policy pays out and the amount that you still owe on the vehicle. Thus, this policy is specific to the covered vehicle and to the loan you took out to buy that vehicle. Typically, you pay for it in one lump sum upfront but in some cases, you may make monthly payments. So, why do people get gap insurance? Below we highlight some reasons why an auto loan borrower may consider gap insurance:- You got a vehicle that depreciates speedily. When you bought your car, truck, or SUV, your lender may have required you to purchase gap insurance, especially if you purchased a vehicle that depreciates more quickly than average.
- You made a small or no down payment. You may have purchased gap insurance if you didn’t pay a down payment (or paid just a small one) and chose a long loan term. In this situation, there’s probably going to be a period of time when you could owe more on the vehicle than it’s currently worth.
In both these scenarios, gap insurance can provide coverage for the difference between what the car is actually worth and what your regular car insurance would pay out on it. Note that, although you can buy gap insurance at the dealership as guaranteed asset protection or GAP waiver coverage, you can also talk to insurance agents to see what it would cost through them. When you add it to your current car insurance policy, rates are typically lower. An Example of How Gap Insurance Works
As a high-level example of how gap insurance could work, keep reading. Let’s say: - You’re buying a car for $30,000.
- You put 5% ($1,500) down and borrow $28,500.
- At a 4% interest rate for a six-year term, your monthly payment is about $445.
- After a year, your outstanding balance would be about $24,200.
- With a depreciation rate at 20%, the value of the car at that time would be about $19,200.
If the vehicle is totaled and you have collision insurance that will cover the current value of your car, you now have no car and you still owe about $5,000 ($24,200-$19,200) on the vehicle loan. Gap insurance is intended to cover that difference so you won’t have an outstanding balance on the loan from a previous vehicle when you need to shop for a new one.Gap Insurance Refunds
Under certain circumstances, you can receive a refund on a gap insurance policy that was paid in full upfront. These circumstances include when you’re:- Paying off, trading in, or selling the car that has the policy.
- Refinancing. Since you will have paid off the old loan with a new one, you may be entitled to a refund, again, only if you paid for a gap policy in full upfront.
- Sure that the loan balance is less than the insurance coverage you have on the vehicle, ideally by at least a couple of thousand dollars.
If you’re in any of these situations or if other circumstances make you wonder whether you’re entitled to a refund, contact your insurance agency. You’ll need to provide your policy number and verification of the situation that may entitle you to a refund—for example, that you’ve sold your car. In that case, you can provide your insurer with paperwork that demonstrates proof of sale. Requirements for cancellation can vary by state and by insurance company and policy, so find out what else is needed so you can provide that, too. Again, note that these situations apply when you’ve paid for your entire gap insurance policy upfront, not when you pay a monthly gap insurance premium. What Happens to Gap Insurance When You Refinance an Auto Loan?
When you’re refinancing a car loan on a vehicle that has gap insurance coverage, you’re refinancing the loan on the vehicle, not the gap insurance. That’s because the gap policy taken out was connected to the original loan and, when that loan is paid off, the gap insurance policy is no longer in effect. If you’ve paid your gap insurance in full already, you’ll likely get a prorated refund.If you were paying your gap insurance in installments, you probably won’t get a refund.However, you may want to buy a new gap insurance policy that will fit your new loan. To determine whether you need it, consider the following:- First, does your new lender require gap insurance on your loan?
- Next, if it’s not required, ask your car insurance company what it would pay out if your car was totaled.
- Compare that amount to what you owe. If you owe less than the car's value or the numbers are fairly close together, decide whether it makes sense to get a new gap insurance policy. If you owe more than the vehicle’s value, is this a number that you could afford to pay in addition to costs associated with getting a new vehicle?
Refinancing an Auto Loan Today
There are several pros and cons of refinancing, including the following:Pros
You can:- Lower your interest rate and/or your monthly payments
- Get a different loan term
- Free up money to pay down other debt
- Switch lenders if you aren’t happy with your current one
Cons
You may:- Need to pay a prepayment penalty if you refinance a car loan that features a prepayment penalty clause
- Need to pay fees for the new loan
- Experience a temporary dip in your credit score.
- Struggle to find a lender who will refinance a high-mileage car, a car older than 10, or an auto loan balance less than $7,500 or more than $100,000.
The best time to refinance auto loans will differ for everyone, and each person’s individual needs will determine how long to wait before refinancing.If you can get a lower interest rate, then it often makes sense to refinance. If you're struggling with high payments, a lower interest rate can help. So can refinancing for a longer term although you may pay more in interest over the loan's life that way. There is no one “right time” to refinance. Mostly, it depends upon your personal financial situation. Having said that, some banks may require that you keep your old loan for a period of time, perhaps six months, before it will refinance the vehicle. If you still want to refinance, in that scenario, you’d need to seek out a new lender. Whatever you’re wondering, don’t be afraid to ask questions when refinancing. To help you make sense of the industry lingo that you may hear, you might want to familiarize yourself with frequently used auto loan terminology. The Takeaway
Gap insurance policies help to pay the difference between what you owe on a vehicle and its value if your car is totaled or stolen. There are times when you can get a refund on the policy if you’ve paid for the policy in full upfront. And when refinancing to a new loan, if the lender doesn’t require gap insurance, you can decide whether to get a new gap policy on the new loan. When you are looking to refinance an auto loan, Lantern by SoFi can help. Fill out one simple form and compare auto refinance rates.
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About the Author
Kelly Boyer Sagert
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
