How to Refinance a Car Loan With Gap Insurance?

You likely purchased gap insurance when you were buying your latest vehicle. If you’re interested in refinancing your automobile, you might have a few questions about how that will impact your gap insurance. For example, do you get a refund for it? Can gap insurance be transferred to a new vehicle?

Our article aims to answer some FAQs you might have about refinancing your vehicle loan.

How Does Gap Insurance Work?

Gap insurance is a type of auto insurance that provides coverage to the vehicle borrower. This type of insurance provides coverage in various situations, such as when the borrower’s car is stolen or damaged before they can pay off the loan. As the name suggests, the gap between the amount owed and the amount the insurance policy covers is provided through gap insurance policies. 

Although gap insurance is typically purchased when you buy a new vehicle, there are a few scenarios when it becomes relevant. One of the main reasons people get GAP insurance is that they own a vehicle that depreciates quickly.

People unable to make a sizeable down payment for a vehicle or any down payment also opt for gap insurance to cover their long-term loans. However, most companies recommend purchasing GAP insurance every time you buy a vehicle, regardless of its type or how many payments you can make.

So, how does gap insurance work?

Let’s say you purchased a car priced at $40,000. You made a down payment of 15% of $40,000 ($6000) and had to borrow the remaining amount ($34,000). Suppose you get in a car accident, and the vehicle is totaled after a year of payments. 

Your insurance company will cover the current value of your car, which is $30,000, which means that you’ll still have a debt of $4,000 on the car loan you initially took out. However, gap Insurance covers the difference, so you don’t have to pay it off out of pocket.

Refunds on Gap Insurance

In some rare cases, you might receive refunds for gap insurance that you paid in full. However, by following the RateGenius guidelines, one can see that a few requirements need to be fulfilled for it.

Ways to get refunds on gap insurance:

  1. Pay off the loan or sell the car that has a refund policy attached to it.
  2. You refinance your car and pay off your old loan with the funds from a new loan. Therefore, refinancing your vehicle can result in getting a refund on your gap insurance. However, specific requirements must be met to get a refund, such as paying the gap insurance in full, upfront.
  3. Your remaining loan balance is much lower than the GAP insurance coverage. Therefore, it should be lower by at least a thousand dollars.

If you find yourself in any of the previous situations, contact your insurance company with the policy immediately. You’ll be entitled to a gap refund.

However, since there’s paperwork to be filled out and reviewed, it might take time for you to secure your refund. For example, part of the refund procedure includes providing a policy number or proof of sale.

Note that you can only get a refund on your gap insurance policy if you paid for it upfront. However, the policy does not apply when you pay for monthly insurance.

Refinancing a Car Loan With Gap Insurance

If your car has gap insurance and you’re refinancing the car loan, you’ll be refinancing the original vehicle loan, not the gap insurance itself. It’s because your gap insurance policy links with the original vehicle loan.

Once your loan gets paid off, there is no longer a linked existing insurance policy in effect. In addition, you’ll likely get a refund if you’ve already paid your gap insurance policy in full. 

However, it’s unlikely that you’ll get a refund if you haven’t fully paid for your gap insurance. In addition, you should know that since your gap insurance will no longer exist after refinancing your loan, you cannot transfer it from one vehicle to another.

Although, you’ll still want gap insurance coverage after refinancing your loan. So, it’s better to contact a lender who will sell you new gap insurance coverage.

Benefits of Refinancing a Car Loan

There are several benefits to refinancing a car loan, including:

  • Reducing your monthly payments and lowering your interest rate on payments
  • Allowing you to set different terms for your loan
  • Enabling you to free up finances and pay off your other debts
  • Allowing you to switch over to other lenders if you’re dissatisfied with the one that you currently have

You should refinance your car loan if it helps lower your interest payments. Most people tend to struggle with high monthly repayment amounts. So, a lowered interest rate will significantly reduce the amount you pay every month. 

Most individuals try to wait for the perfect time to refinance their loans. However, there’s no correct time to refinance. You should refinance your car loans only after assessing your financial situation. 

Typically, you should refinance your car loan if your credit score has improved and when you can make faster repayments. It’s also better to refinance sooner than later when rates are lower. In addition, it will help you save money by lowering your monthly interest payments for new car loans.

However, some banks will have policies requiring you to keep your old loan for a specific time, usually around five to six months. After that, you’re free to refinance your vehicle loan at will.

Refinance a Car Loan With Gap Insurance Summary

Gap insurance policies were designed to bridge the gap between the amount owed and the car’s total value covered by the insurance company. In certain situations, you can get a refund on your gap insurance. For example, you may get a gap insurance refund after refinancing your car loan.

However, a new gap insurance policy is required once you refinance your car loan. Contact your insurance provider and decide if it’s feasible for you to get gap insurance for your new vehicle loan.