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A lemon car is a new or used vehicle with a major problem that surfaces after you buy or lease it. If the dealer can’t fix the car, there are laws in place that enable you to to trade the car in for a new one or get your money back.

Lemon cars sometimes end up back on the market with “lemon titles” at deeply discounted prices. For a buyer who is knowledgeable about cars and willing to take some risk, a lemon car can sometimes be a good deal.

Here’s what you need to know about lemon cars, from how to figure out if you have one to whether or not it’s ever a good idea to buy one.

Lemon Car Meaning

While the legal definition of a lemon car varies from state to state, it generally refers to a vehicle that has a substantial defect that the manufacturer or dealer is unable to fix after a reasonable number of attempts. Typically, the defect needs to be something that makes the car unsafe or difficult to drive, such as faulty brakes, a broken transmission, or a dead engine.

It’s important to note that a lemon is different from a recall. A recall is a common occurrence in which a particular defect within the car needs to be fixed at the manufacturer’s expense. The defect is usually announced by the automaker and fixed by the dealership. A lemon, on the other hand, has a problem the dealer is not able to fix in a reasonable amount of time.

Lemon Car Laws

There are lemon laws on the books in every state to help protect consumers. Though the details vary, lemon laws essentially work like this: If you purchase a new or used vehicle that has a defect or condition that impairs its value and it has not been repaired after several attempts (typically three or four trips to the dealer), you should be compensated for the defect.

Remedies vary depending on the type and severity of the problem. The maximum compensation is either the complete repurchase or replacement of the vehicle, whichever is preferred by the customer.

When you make a lemon law claim, you’re basically saying your car didn’t live up to its warranty. That means you have to buy a car with a warranty to have a good case. However, it doesn’t have to be a brand new car. Used cars and trucks sold with warranties get lemon law protection as well.

You can find your state’s lemon laws by visiting the Better Business Bureau’s list of lemon laws by state or going to the website for your state’s attorney general or consumer protection office.

Determining If You Have a Lemon Car

If you recently purchased a new or pre-owned vehicle and you’re having a major issue with the car, you might have a lemon on your hands. Here are some of the signs that car might be classified as a lemon:

•  There are recurring problems with vehicle components, such as the brakes, transmission, or engine.

•  The issues affect the car’s safety and driveability.

•  The problems are not the result of poor maintenance or an accident, but rather appear to have come with the car.

•  The problems have not been resolved after a reasonable number of repair attempts.

You can also do some research to find out whether other drivers have had similar issues with the same make and model of vehicle.

If you think you have a lemon car, it’s a good idea to start collecting detailed records, including records of repair attempts and any correspondence you’ve had with the dealer or manufacturer. To start a complaint against the dealership that sold you the car, you’ll need to mail them a certified letter.

While you can often start a case without a lawyer, should the case become complicated or the dealership fights you on a refund, it can be a good idea to get professional legal advice.

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Lemon Title Car Value

If a car is determined to be a lemon, the manufacturer will generally take the car back and either replace it or reimburse the customer for the purchase price.

The car will then receive a “lemon” or “lemon buyback” title. If the dealer puts the car back on the market, they are legally obligated to let any potential buyers know that the car has a lemon title. This ensures that any future owner is aware that they are buying a lemon car that may have major issues.

A lemon car title is similar to a salvage title, which is given to a vehicle that’s considered a total loss by an insurer.

Though a lemon title is not as devastating to a car’s value as a salvage title, lemon title cars are typically offered at steeply discounted prices, which can make them tempting purchases.

However, buying a lemon car means you are willing to purchase a car that potentially has big issues. If the car had been repaired, it would no longer have the lemon title, but instead a rebuilt title.

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Pros of a Lemon Car

There are certain advantages to buying a lemon title car, the biggest of which is its reduced price. These cars can be relatively cheap compared to buying that same car new or nearly new.

Another plus is that, aside from whatever defect it may have, the rest of the car is likely in nearly mint condition. Because these cars are returned within the warranty period, they often have relatively low miles on the odometer and little depreciation.

Depending on the car’s defect, you may potentially be able to get it fixed without a lot of added expense. To make sure that’s the case, however, it’s a good idea to review a lemon car’s history to find out exactly what the problem was that caused the lemon title, and also get the car thoroughly inspected by your mechanic.

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Cons of a Lemon Car

One of the biggest disadvantages of buying a lemon car is that you don’t know exactly what you’re getting yourself into. In some cases, the reason a car was given a lemon title is because it has a complex problem that is difficult to sort out and repair. This could mean you’ll need to spend significant time and money to resolve the issue. The car could also potentially have other problems that have not yet surfaced.

Also keep in mind that when you buy a lemon car, you’ll get the lemon title, as well as a limited warranty. You can’t return the car. Lemon laws don’t apply because you bought the car knowing it was a lemon.

Another factor to consider is resale. Should you later decide to sell the car, potential buyers may balk at a lemon title, especially if the car is still experiencing issues. The appraisal value of the car may also be low due to the lemon title and the fact that the car is no longer nearly new.

Recommended: What Credit Score Do You Need to Refinance a Car?

Can You Refinance a Lemon Car?

If you took out a car loan to buy a car that turned out to be a lemon and got a refund, that money can be used to pay off the loan.

If the automaker replaces the vehicle, however, you can typically just keep the loan you have. You can also likely refinance that loan at some point down the line. Car loan refinancing essentially involves getting a new loan — ideally with better rates and terms — that you use to pay off your original loan. You then only make payments on the new loan. Refinancing can make sense if rates have gone down, you want to lower your monthly payments, and/or you’ve built your credit (and you can qualify for better rates and terms).

If you purchase a car with a lemon title, however, you may find it tricky to find financing. Lenders tend to be risk averse, which means they may not be willing to offer a loan for a vehicle with an uncertain future value.

However, if the lemon car has been repaired and now has a rebuilt title, you may be able to find a small bank, credit union, or online lender willing to finance, or refinance, the car.

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The Takeaway

If you purchase a car and it turns out to be a lemon, there are consumer laws in place to make sure you’re not stuck with the vehicle. For some intrepid car buyers, however, lemons present an opportunity to buy a car at a steep discount. If you think that the savings on the purchase price will more than make up for the cost of repairs, it might be a smart move.

Just keep in mind that you may find it difficult to find financing for the car unless it has been repaired and now has a rebuilt title. If the car is replaced, you may eventually have more options available, such as refinancing your loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What does it mean when a car is a lemon?

A car is a lemon when it has a manufacturing defect that affects its safety and utility, and that defect can’t be fixed despite multiple attempts. If the vehicle is still under its warranty, you can file a claim with the manufacturer to have the vehicle bought back.

How do you determine if you have a lemon car?

If you have a car with chronic issues that is still under warranty, and the dealer has not been able to fix the problem after multiple attempts, you may have the right to make a lemon claim and get a new car or financial compensation.

Are there laws against financing lemon cars?

No. You can finance the purchase of a car with a lemon title. However, you may have difficulty finding a lender who is willing to provide a loan due to the increased risk involved.

Photo credit: iStock/skynesher

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOALR-Q325-070

A balloon payment car loan works differently than standard auto loans. Rather than making steady, equal payments throughout the loan’s term, you’ll pay lower amounts each month up until the very last payment, which is the balloon payment.

While a balloon payment car loan can help keep your car payments lower for the time being, there’s always the risk that you won’t be ready when the big payment arrives. Read on to learn more about balloon auto loan pros and cons and how they differ from traditional loans and car leases.

What Is a Car Loan With a Balloon Payment?

A balloon auto loan is a final scheduled payment on your car loan that’s substantially greater than the prior monthly payments.

With a balloon auto loan, payments are smaller over its term — until the last payment, when the remaining balance is paid off in a large lump sum. This is different from how car loans work usually, where borrowers make a series of equal payments spread out over the loan’s term (for example, 36, 48, or 60 months).

When looking at who offers balloon auto loans, you may find that these loans are largely limited to dealerships. There will likely be fewer options to compare as opposed to if you were looking for a traditional car loan or to lease a vehicle.

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How Balloon Auto Loans Work

Just like with traditional loans, the lender will offer an interest rate and certain terms and conditions for a balloon auto loan. What’s different about an auto balloon loan is that all but one payment will be lower: the final payment, or the balloon payment. This last payment will be significantly larger than the others, perhaps as much as half of the vehicle’s value.

The lender may, for example, offer a 48-month term with half of the amount due as the 48th or 49th payment. The other half of the amount owed would be broken down into 47 or 48 regular payments, which would be lower than what you’d get with a traditional car loan.

Balloon Auto Loans vs Traditional Auto Loans

As the definitions provided show, a car loan with a balloon payment is significantly different in structure than a traditional auto loan. While the monthly payments in a balloon payment auto loan are not intended to pay back the whole loan amount, traditional auto loan payments are designed to do exactly that.

To see exactly how balloon vs. traditional auto loans stack up, here’s a comparison. For the example, assume the following:

•  The loan amount is $40,000.

•  The loan’s term is 48 months.

•  The interest rate is 6.00%. (Note that a lender may offer different interest rates for auto balloon loans and traditional auto loans. In fact, loans with a balloon payment tend to be a higher risk for lenders, who therefore may charge a higher interest rate. But, for the sake of comparison, this example assumes the rate is the same.)

Traditional Auto Loans

For a traditional auto loan, the lender calculates a monthly payment based on the loan amount, interest rate, and term.

In our example, the monthly payment would be $939. At the end of the loan, the balance would be paid in full.

Balloon Auto Loans

With a balloon auto loan, the lender calculates a monthly payment on a portion of the loan amount (we’ll use 50%), interest rate, and term.

In our example, the monthly payment would be $469.50. At the end of the loan, however, there would be a $20,000 balance remaining that could be covered in cash, by selling the vehicle, or by refinancing your auto loan.

Traditional Car Loan vs Balloon Auto Loan (Based on Above Example)

Auto Balloon Loan vs Leasing

Taking out a loan that comes with an ending balloon payment is different from negotiating a car lease. With the first, you’re buying the vehicle and seeking the financing to do so. With the second, you’re essentially renting the vehicle, often with an option to buy it at the end of the lease.

Plus, with a lease you’re agreeing to limiting parameters — most notably, that you’ll stay within certain mileage limits. This isn’t the case with an auto loan with a balloon payment.

That being said, an auto balloon loan and leasing can be similar. With a car balloon loan and a short-term car lease, you can refinance or pay off the remaining balance in cash. If paid off in cash, then the vehicle is yours, free and clear. If you opt to refinance, then you’ll make monthly payments based on that loan’s interest rate and terms.

Balloon Auto Loans Pros and Cons

Wondering what the upsides — and downsides — of balloon auto loans are? Here’s a rundown of balloon auto loan pros and cons:

Balloon Auto Loan Pros

Here are the potential positives of a balloon payment car loan:

•   Up until the last payment, the amount owed is lower than with a comparable traditional loan.

•   Depending on how the lender structures the loan, you may be able to sell the vehicle and use that money to make the balloon payment.

•   You’ll have more cash in hand (until the final payment is due), which can help with cash flow.

•   You could take the difference between the traditional payment ($939 in our example) and the balloon one ($469.50 in our example) and save or invest those funds.

•   Because payments are lower, it’s more likely that you’ll be able to meet the monthly obligation.

Balloon Auto Loan Cons

On the other hand, here are the possible pitfalls of a car loan with balloon payment:

•   It may be challenging to make the final payment.

•   Interest rates may be higher.

•   Not making the balloon payment can hurt your credit scores.

•   The smaller payments you’re making mostly go to interest, which can put you in an upside-down situation (where the vehicle is worth less than what’s owed on it) if you try to sell or refinance the car when the balloon payment is owed.

•   Because the pre-balloon payments are much smaller than they would be with a traditional loan, it can be tempting to spend more than you can afford on the vehicle.

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Options for Dealing With a Balloon Payment

Here are some possible options for dealing with a balloon payment:

Paying the Car Off

One option for dealing with a balloon payment is simply paying it off when due. Making the large payment when due at the end of your balloon auto loan term would effectively pay off the loan and give you full ownership of the car.

Selling the Car

Another option for dealing with a balloon payment is selling your car to help you cover the outstanding balance of the loan. As mentioned earlier, you may be able to sell the vehicle and use that money to make the balloon payment.

Returning the Car

Some lenders may give you the right to return the vehicle as an alternative to making the large balloon payment. Lenders, however, may impose certain fees if you return the vehicle as an alternative to making the balloon payment.

Refinancing

Certain lenders may allow you to refinance a balloon auto loan as an alternative to making the large balloon payment. Refinancing allows you to replace the large final payment with manageable monthly payments by securing a new loan. To refinance, you’ll need to meet the lender’s credit requirements and provide necessary documentation like income proof and vehicle details.

Trading It In

You may consider trading in your car as an option for dealing with a balloon payment. Trading in your car may be challenging if your balloon auto loan is underwater. But if the value of your car is greater than the balloon payoff amount, trading in the vehicle at a car dealership can help you meet your balloon payment obligations.

Planning Ahead for Your Balloon Payment

Planning ahead for your balloon payment can help you determine a course of action that’s right for you. You can budget and set money aside if you plan on making the lump sum balloon payment. Or, you may choose to refinance your balloon auto loan. If so, it’s best to shop around for lenders and apply for the refinance well before the balloon payment is due.

Unless required by law, there’s no guarantee a lender will approve your balloon refinancing request. Planning ahead can help you prepare for your looming balloon payment or help you determine an alternative course of action that’s right for you.

Recommended: What Is a Private Party Auto Loan?

Is a Balloon Payment Car Loan Right For You?

Times when taking out a balloon payment car loan can make sense include the following situations:

•  You’re expecting additional income to be available when the balloon payment is due.

•  Investments you own will mature before the balloon payment is owed.

•  You have the money to make the higher payments, but you appreciate how the lender is carrying the deficit for you during the loan’s term.

•  You don’t have much money for a down payment, but you can meet the monthly car payments (and will be able to manage the balloon payment).

On the other hand, if you have any doubts about your ability to hand over that hefty last payment at the end of the loan’s term, a balloon payment auto loan might not be the best idea.

Recommended: What Are Car Loan Charge Offs?

Requirements for Balloon Payment Auto Loans

Although each lender will have its own requirements, in general, the two main requirements for a balloon auto loan are similar to those of a traditional car loan. Specifically, you will need to:

•  Have steady employment and an income that demonstrates to the lender that you can meet the car payments.

•  Have a credit score that meets or exceeds the individual lender’s standards.

Other Ways to Lower Your Car Payment

The lower monthly amount of a balloon payment car loan is an attractive feature to many people who want to buy a vehicle. If you’re seeking to lower the payment on your current vehicle or are exploring how to pay off a car loan with balloon payment, refinancing also can be an option.

You may decide to refinance with the same lender again, or you may compare loan programs among various lenders.

In either case, take into account the cost to refinance.

Before refinancing, it’s also important to take into consideration the pros and cons of refinancing your car. While you may end up with lower interest rate or lower monthly payments, thus freeing up some extra cash, you could also face fees and prepayment penalties.

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The Takeaway

When buying a vehicle, a balloon loan is structured differently from a traditional vehicle loan. Payments throughout the term are lower because they’re based on only a portion of the loan amount with the remainder of what’s owed due and payable on the loan’s last payment. There are pros and cons to balloon payment car loans, and it makes sense to carefully weigh them before making the decision that’s right for you, as well as consider other options for affording a car.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is a balloon car loan a good idea?

A balloon car loan can be a good idea if you want lower monthly payments and plan to pay off the loan or trade in the car before the balloon payment is due. However, it carries risks, including a large final payment and potential difficulty refinancing or selling the vehicle.

Can you pay off a balloon car loan early?

Yes, you can typically pay off a balloon car loan early, but it’s important to check your loan agreement for prepayment penalties. Paying early can save on interest and reduce financial stress from the large final payment, making it a smart option if your finances allow.

Can you pay off a balloon payment in installments?

Paying off a balloon payment in installments depends on your lender’s terms. Some lenders may allow restructuring the payment into smaller installments, but this often requires refinancing. Discuss options with your lender in advance to avoid default or financial strain when the large final payment becomes due.

Photo credit: iStock/sefa ozel

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOALR-Q325-069

You’re driving through an intersection when you get T-boned by another car. You’re fine, but your car is totaled. Since you’re still paying off this car, you may wonder: What happens to that loan? Will your car insurance cover the balance?

The answer is, it depends.

Your car insurance will only cover the current value of the car. If the balance on your car loan is larger than that, you will have to cover the difference out of pocket. That is, unless you’ve purchased a GAP waiver agreement when you financed the car. If you did, the full amount of the loan will be covered by this policy. Below we highlight what a GAP waiver is and what it covers.

What Is a GAP Waiver?

GAP (Guaranteed Asset Protection) insurance is an optional add-on to your car loan contract that waives your obligation to pay the remaining balance on your auto loan in the event your car is totaled or stolen before you’re finished paying it off. GAP waivers are available for both new and used cars.

You can buy a GAP waiver when financing or refinancing a car, and the coverage can be paid in one lump sum or rolled into your auto loan. Once purchased, GAP will provide coverage for as long as your loan remains in place, provided you adhere to the terms of your loan contract.

Without a GAP waiver, insurance will only cover the car’s actual cash value (ACV), also known as its book value, in the event the car is totaled or stolen. You would then need to make up the difference between that amount and the loan balance.

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What Is Loan-to-value (LTV)?

A loan-to-value (LTV) ratio is the total value of your loan divided by the ACV of your car. You can use this formula to figure out the LTV ratio, expressed as a percentage:

Loan amount / car value x 100 = LTV

If you’re borrowing $30,000 to finance a car valued at $35,000, the LTV would be about 86%. If after a few years, you still have $20,000 left to pay on your loan and the car’s value dropped to $15,000, your LTV would be 133%, which means you owe more than the car is worth.

In this scenario, if your car got totaled or stolen, you would have to cover the gap between your loan balance ($20,000) and the car’s value ($15,000), or $5,000. If you had a GAP waiver, on the other hand, insurance would pay it.

What Does GAP Cover?

Regardless of whether your car is damaged to the point that it is unusable or was stolen, a GAP waiver will cover the remaining balance on your car loan that your auto insurance policy won’t pay for. In some cases, GAP waivers will also cover the cost of your insurance deductible, up to a limit as defined by your contract.

What Does GAP Not Cover

GAP typically only kicks in when your car is damaged beyond repair or has been stolen, and it only covers what you owe on the car. This means GAP won’t cover other people or their property. It also means it won’t foot medical bills or legal costs related to an accident.

Other costs GAP typically doesn’t cover include:

•  Loan balances over a specified LTV (such as over 150%)

•  Refundable additions made to your loan or lease contract, such as a vehicle service contract

•  Loan interest accrued after the date you lost your car

•  Past due loan payments

•  Late charges and other fees

•  Cost of renting a car

7 Times When a GAP Waiver Is Helpful

GAP waivers are typically not required when financing the purchase of a car (leasing companies may require them), but here are seven scenarios where it may be worthwhile to purchase optional GAP waiver coverage:

1. Upside-Down Auto Loans

If you have an upside-down auto loan, which means the amount you owe is more than the cash value of your car, then it may be a good idea to add a GAP waiver. If you were to total a car with an upside-down loan (or it got stolen), you would end up owing more to the lender than the insurance would pay out (which would max out at the car’s current value).

2. Small Down Payment

Your down payment size matters when financing the purchase of a new or used car. The more money you put down on a car, the lower your LTV ratio, and the lower the chance you’ll ever owe more than your car is worth. If you put down less than 20% on a new car purchase, however, it might be worth getting a GAP waiver. Depreciation starts as soon as you drive the car off the lot, and having a high loan balance exposes you to out-of-pocket costs in the event your car is stolen or totaled.

3. High Mileage Vehicle

If you put a lot of miles on your car, it will depreciate faster. That means if your car became unusable at some point, its value could be lower than the amount you owe on the loan. This could expose you to costs in the event that it gets totaled or stolen.

4. Luxury Cars

Luxury cars often depreciate faster than non-luxury cars. Before financing your car, and before making a decision about a GAP waiver, you might want to research the make and model of the car and how quickly you can expect it to depreciate. If the value will decline quickly, a GAP agreement could be a good thing to have in your back pocket.

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5. High Interest Rate

When you take out a car loan, you typically pay more toward interest in the beginning of your loan amortization schedule. Having a higher-than-average car loan interest rate can affect how quickly you build equity over time. If the car gets totaled or stolen before you’ve had a chance to build much equity, you would likely owe more on the loan than the value of the car.

6. Long-Term Auto Loans

A long-term car loan creates a problem similar to having a high interest loan. The longer the loan term, the longer it will take you to build up equity. This leaves you vulnerable to a period of time during which your loan balance may be higher than the value of the car.

7. Leased Vehicles

Some creditors require you to obtain GAP coverage when you lease a car. A GAP waiver (or something similar called loan/lease coverage) may be part of the agreement when you lease a vehicle. Should your car get totaled or stolen, and you need to terminate your lease early, it will cover the “gap” between the early termination payoff and the value of the car.

Recommended: What Are Car Loan Charge Offs?

GAP Waiver vs GAP Insurance

A GAP waiver and GAP insurance offer the same type of coverage. The only difference is where and when the policy is purchased.

A GAP waiver is an add-on that’s offered by your lender or finance company when you take out a loan on the car or when you refinance it. GAP insurance, on the other hand, is an outside product that’s available through a licensed insurance agent or broker and can be purchased at any time, even if you’re using a loan to buy a car from a private seller.

Driving with GAP coverage typically isn’t necessary when financing a car purchase, but it can provide some peace of mind. If your car gets totaled or stolen, you won’t get hit with having to pay off a major part of your loan.

Your existing auto insurance policy typically only covers the cash value of your car. Because of depreciation, there’s a chance that your coverage won’t be enough to pay for the full amount of the loan, particularly during the early months or years of your loan, when you haven’t built up much equity in your car.

Buying a GAP Waiver Agreement

A GAP waiver is typically offered as an additional option to your loan when you are buying or refinancing a car. You generally have the option of paying for it upfront in one lump sum or having it folded into the loan. You’ll sign the waiver at the same time as you sign the rest of your loan documents.

When you purchase a GAP waiver, you may receive a GAP waiver agreement that spells out all the terms and conditions of the coverage, including the GAP refund policy if one exists.

Recommended: How Car Loan Refinancing Works

Adding GAP Coverage to an Existing Loan

In general, a GAP waiver may only be purchased at the time you are taking out a new loan or refinancing an existing loan; you can’t add it on later. You can, however, purchase GAP insurance from a third-party company at a later date, as long as the loan has not been fully paid off.

The Average Cost of a GAP Waiver

If you purchase a GAP waiver from a lender or financing company at the time of financing or refinancing, the average cost is typically $500 to $700. While it may be hard to come up with that full amount all at once, if you fold this cost into your loan amount, you may pay interest on the cost of the waiver. Purchasing GAP insurance separately from a third-party insurance company tends to cost less. You may be able to get GAP insurance for $20 to $40 per year if you bundle it into your existing auto insurance policy.

GAP Refund

Unless GAP was required by your creditor (such as in the case of a lease), you can typically cancel it at any time. And you may be entitled to have all or some of the cost refunded. It all depends on what’s in your contract, how soon you ask for a refund, and how you paid.

You may be able to get a full refund if you cancel within a certain period of time (such as 30 or 60 days). If it’s later than that, and you paid in full upfront, you may be able to receive a prorated amount back. If you rolled the cost of the waiver into your loan amount, it will likely be harder to get a refund.

What Happens to a GAP Waiver During the Refinancing Process?

Because the GAP waiver is tied to your original loan, it won’t carry over to your new loan when you refinance your car. However, you may be able to get a refund of some of the cost of the waiver. In addition, you can purchase a GAP waiver for your new loan through your new lender.

There are pros and cons of auto loan refinancing. You may pay more interest over the life of the loan if you refinance with an extended term. Refinancing for a lower interest rate without extending your term can lower your total borrowing costs over the life of your loan.

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The Takeaway

GAP coverage can make sense in any situation where your loan balance is likely to be larger than your car’s actual cash value, such as when you’re starting out upside-down on a car loan, you have a high interest rate, you put little down on the car, or you put a lot of miles on your car.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What does a GAP waiver cost?

If you’re buying a GAP (Guaranteed Asset Protection) waiver directly from the dealership or lender, the average cost is typically $500 to $700 as a one-time fee. Adding it to your existing car insurance policy can run anywhere from $20 to $40 a year.

Why is it called a GAP waiver?

GAP waiver stands for Guaranteed Asset Protection waiver. It is an optional, add-on coverage that can help cover the “gap” between the financed amount owed on your car and your car’s actual cash value, in the event where the car is declared a total loss.

What happens to a GAP waiver when you refinance an auto loan?

When you refinance your vehicle, your GAP waiver doesn’t roll over to your new loan. You might be able to get a prorated refund, and you can purchase a new GAP waiver for your new loan.

What is the difference between GAP insurance and a GAP waiver?

A GAP waiver is an add-on that’s offered by your lender or finance company when you take out a car loan or when you refinance it. GAP insurance, on the other hand, is an outside product that’s available through a licensed insurance agent or broker and can be purchased at any time, even if you’re using a loan to buy a car from a private seller.

What is a GAP waiver refund?

A GAP waiver refund is a return of some or all of your paid GAP coverage costs. If you’ve purchased GAP waiver coverage and then canceled GAP within 30 days, you might be entitled to a full refund. In other cases, you may be entitled to a prorated refund if you cancel your GAP coverage.

Photo credit: iStock/PixelVista

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-068

If you’re looking to refinance your auto loan (and potentially lower your rates and/or payments), you will likely need to present proof of car insurance as part of the application process. What exactly is proof of insurance? It’s a card or letter that states you have current and valid auto insurance up to the state minimum.

Before you start going down the road to refinance, here’s everything you need to know about proof of insurance — what it is, how to get it, and why you need it.

What Is Proof of Insurance?

Proof of insurance is an important document issued by your insurer that states you have an active car insurance policy. The information included can vary, but proof of insurance typically contains:

•  The policyholder’s name and address

•  Insurance company’s name, address, and phone number

•  Effective date and expiration of the policy

•  Policy number

•  The year, make, and model of the car

•  The vehicle information number (VIN)

•  Coverage amounts

Your car insurance card may also show confirmation that your policy meets your state’s minimum requirements.

What Is a SR-22 Certificate?

An SR-22 certificate is a form that is filed with your state to show that you are meeting your state’s minimum auto liability insurance requirements. Not everyone needs an SR-22. Laws vary by state, but in general, drivers may need to have their insurance company file an SR-22 form with the state department under the following circumstances:

•  Conviction for driving under the influence

•  Serious and/or repeat traffic offenses

•  An at-fault accident with no insurance

What Counts as Proof of Car Insurance?

The document used as proof of insurance might be a physical ID card, a PDF of the ID card you can print, or a digital card accessed through a mobile app. Law enforcement in every state except New Mexico will accept proof of insurance on a mobile app. You may also be able to use a proof of coverage letter from your insurance company that has details about your policy as proof of insurance.

Why Do I Need Proof of Insurance?

There are several situations in which you need to show proof of insurance, including:

•  If you are pulled over by law enforcement

•  If you are in an accident and need to exchange insurance information

•  If you are registering a newly purchased vehicle or renewing your license plate at the Department of Motor Vehicles (DMV)

You will also likely need to show proof of insurance if you are applying for a new auto insurance policy, whether it’s to finance or refinance a vehicle. Why is this necessary? Lenders generally want to make sure that insurance will protect their investment, since they also own the car until you fully pay off the loan. Otherwise, if the car is damaged or totaled, the lender would have to get the money from you for repairs or to replace it, which is typically much harder than having the insurance company pay for it.

Failure to Show Evidence of Insurance

What happens if you don’t have proof of insurance? The consequences will vary, but assuming you are insured, they are usually relatively mild. If you’re pulled over by the police for a violation and do have coverage, but don’t have your card on you, you will likely be given a certain timeframe to prove that you are covered. If you later show proof of coverage, you might have to pay a small fine or, possibly, no fine. Fines are generally higher if you are not carrying proof of coverage at the time of an accident.

Most states don’t put failure to show proof of insurance on your driving record, but if you are in a state that does, your insurer could slightly raise your rates or remove your safe driver discount. Some insurers will let the first incident slide, but will impose consequences if it happens a second time.

If you actually don’t have car insurance, the consequences get more serious. You may have your car impounded or your license suspended. And, if you get pulled over multiple times without car insurance, you could possibly go to jail. If you are at fault in an accident, you may be responsible for all costs.

Fake Proof of Insurance

You can buy almost anything online, and that includes fake proof of car insurance. Doing so, however, is a very bad idea. Driving without insurance is illegal in most cases and results in a ticket and fine. And, police officers have access to a database that allows them to immediately verify your insurance. Presenting a fake insurance card could constitute insurance fraud and lead to a much steeper penalty.

Do You Need Proof of Insurance to Refinance a Car?

Typically, yes. If you’ve weighed the pros and cons of vehicle refinancing and decided it’s the right fit, you’ll want to make sure you have proof of insurance on the car before you apply for refinancing.

At a minimum, lenders typically want to make sure that your insurance complies with your state’s laws. In many cases, however, they will require that you have “full coverage” on your car to approve you for a refinance. This includes liability insurance, collision insurance, and comprehensive insurance.

You will also need to maintain that coverage for the duration of the financing. Should you drop the required auto insurance coverage, it will be considered a violation of your finance contract and could put your loan in jeopardy. Also, the lender could place single interest coverage (also called force-placed insurance) on the vehicle and add the premium to the loan.

Recommended: How Soon Can You Refinance a Car Loan After Purchase?

How to Get Proof of Insurance for Your Car

There are several ways to get proof of insurance for your car:

•  By regular mail: Your insurance company will typically mail you several copies of your paper insurance card when you start a new policy. If you’ve misplaced your cards, you can call up your insurance company and ask them to mail you some additional cards.

•  Via email: If you need to get your card quickly, you can ask your insurer to email you a copy of your insurance card. You can then print that out and keep it in your wallet or car’s glove compartment.

•  Through an app: Many insurance companies now allow you to access your insurance card through their mobile apps. That means that if you need to show your card but don’t have it handy, you can simply open up the app and display the card on your phone.

Recommended: How Do You Get a Gap Insurance Refund After Refinancing?

What Does an Insurance Card Look Like?

Proof of insurance typically looks like a wallet-sized card with a set of information that includes the name of the insurer, name of the insured, the policy number, and term of policy. It can also be a print-out of an insurance card, or be shown on your phone through an app or website.

Proof of Car Insurance Letter

Proof of car insurance letters from your insurance company also count as proof of insurance. This will contain the same information as the car insurance card, but in letter form. This can typically be used in lieu of an insurance card for an auto loan refinance application.

Recommended: Auto Loan Settlements

Other Documents Needed to Refinance a Car Loan

In addition to your proof of insurance, you will need to supply other information and documents to apply for an auto loan refinance. These often include:

•  Driver’s license

•  Pay stubs from your current employer or proof of employment

•  Your Social Security number

•  Vehicle identification number (VIN)

•  Make, model, and year of car

•  Vehicle registration

•  Current loan information (including the name of your current lender, your loan account number, monthly payment, interest rate, and remaining balance)

Recommended: When Should or Shouldn’t You Refinance a Car Loan?

The Takeaway

Shopping for a better auto loan — and refinancing your current car loan — is typically a simple and straightforward process. However, before you apply for an auto loan refinance, you’ll want to make sure you have proof of car insurance.

Proof of insurance is a paper or electronic card issued by your insurance company stating that your car is currently and adequately insured. If you don’t have one, you can get proof of insurance by contacting your insurance company.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is proof of insurance?

Proof of insurance is a document that proves you have a current and valid auto insurance policy and it meets your state’s minimum liability requirements. It will typically include:

•  The insurer’s name and address

•  The policyholder’s name

•  Effective date and expiration date of the policy

•  Policy number

•  The insured vehicle’s year, make, model, and vehicle identification number (VIN)

How do I get proof of insurance?

You can access your proof of insurance document on your insurer’s website, through their app, or by calling customer service and asking them to send you a paper copy via regular mail or a PDF via email.

Why do I need proof of insurance?

Almost all states require car insurance to register and drive a car. You will need to show proof of insurance if you are pulled over by law enforcement, in an accident, registering a new vehicle, and/or applying for auto financing or refinancing.

Photo credit: iStock/Nastasic

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-067

Financing a car is a major financial decision, and many factors will determine your interest rate and what you ultimately spend on the car. One of those factors is the size of your down payment.

Here, learn what a good down payment on a car is, pros and cons of making a down payment, if making no down payment is ever a good idea, and more.

What Is a Good Down Payment on a Car?

So, what is a good amount to put down when you’re taking out a car loan? The typical down payment on a car is often quoted as 20%, but the truth is that not everyone pays that much.

In the second quarter of 2025, the average down payment on new vehicles stood at $6,579, while the average down payment on used vehicles stood at $4,092, according to Edmunds data.

Banks and other lenders financed an average of $40,873 on new vehicles and $28,166 on used vehicles bought in Q2 2024, Experian data show. The average transaction price for new vehicles surpassed $48,900 in June 2025, according to Kelley Blue Book.

These numbers suggest the average U.S. car buyer puts 10% or more down when buying new or used vehicles.

Down Payment on a New Car

A 20% down payment on a new car could be ideal for establishing an equity stake from the get-go. This may prevent your car loan from becoming an upside down auto loan in which your loan balance is greater than your car’s appraised value.

The way car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges as determined by an annual percentage rate or APR.

Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply.

Down Payment on a Used Car

A 10% down payment on a used car may be sufficient in preventing your loan from starting off underwater. Borrowers are expected to provide proof of identity and proof of income when applying for auto loan financing, among other auto loan requirements.

Say you buy a used car that costs $30,000, and you have no trade-in. If you made a down payment on a car of 11%, that would be $3,300. You’d still have to take out a loan for $26,700. Over five years, your monthly loan payment might be almost $500 if you have excellent credit (meaning you’d qualify for just over a 9% interest rate).. Consider whether you can afford that amount over the relatively long term of your loan.

This calculation doesn’t factor in car loan interest, which can vary depending on several factors, including your credit history, the length of the loan, and how much you plan to borrow.

The right amount to put down depends largely on your finances and priorities. When you’re determining how much to put down on a car, look at the big picture, since this is a debt you may have for several years. Determining how much down payment for a car to make is truly a personal choice.

Calculating Your Down Payment

Calculating your down payment amount can be done by multiplying the percentage of your desired down payment by the car’s total sale price. The formula could be expressed as follows:

(Percentage Down) x (Total Sale Price) = Down Payment Amount

For example, you may calculate a 10% down payment by using the decimal form of 10% and multiplying that number by the total sale price of the vehicle. If the vehicle costs $25,000 to buy, you may use this formula to calculate a 10% down payment:

0.1 x $25,000 = $2,500 Down Payment Amount

You may calculate a 20% down payment on a vehicle by multiplying 0.2 by the vehicle’s total sale price. If the vehicle costs $25,000 to buy, you may use this formula to calculate a 20% down payment:

0.2 x $25,000 = $5,000 Down Payment Amount

6 Benefits of Making a Down Payment on a Car

Some lenders don’t require a down payment on a car at all. Not paying a down payment can be tempting, especially if you don’t have a chunk of cash to spare. But, again, consider how that will impact the length of your car loan (or your term, as it’s called in car loan terminology) and your monthly payments.

Making a down payment brings several benefits you may want to consider as you make your decision. Below we highlight six benefits of making a down payment on a car:

1. Your Monthly Payments Will Likely Be Lower

To state the obvious, the more you pay up front, the less you’ll still owe. That means that potentially, your monthly payments will be lower than they would be if you make a smaller down payment or no down payment at all. That can help your monthly budget going forward.

A classic strategy for lowering car payments is making a sizable down payment when financing a vehicle purchase. Deciding what is a good down payment on a car may depend on what works best for you. Putting 10% – 20% or more down can be ideal if you can afford the up-front payment.

2. You’ll Pay the Car Off Faster

When you pay little to no money up front, you’ve got more work to do to pay off that car loan. Down the road, your loan might even become an upside down auto loan, meaning you owe more than the car is actually worth.

Making a decent down payment on a car may make it easier to take a shorter repayment period (since your monthly payment will be lower). That means you might be able to pay your car off in two or three years, for example, rather than five or six.

3. You May Get a Lower Interest Rate

When you opt for a shorter repayment period, lenders may offer you a good interest rate on a car loan, which means you’ll pay less over the life of the loan.

Also, a larger down payment can indicate to lenders that you’re less of a risk because you’ve made the effort to put more down. That may sway them to lower your interest rate.

4. You May Lower Your Loan-to-Value Ratio

Making a down payment on a car can reduce the loan-to-value ratio of your loan. This ratio, also known as LTV, measures the size of your loan against the value of your vehicle. A higher LTV represents a higher risk to lenders. A lender may offer you better terms and conditions on an auto loan if you reduce the LTV by making a sizable down payment.

5. Avoiding Being Upside Down

As mentioned earlier, a down payment may prevent your car loan from becoming an upside down auto loan. It’s generally not ideal for borrowers to carry a loan underwater. A sufficient down payment may help you avoid carrying a loan balance greater than your car’s appraised value.

6. Improving Loan Approval Chances

Making a down payment on a car may improve your chances of getting approved for financing. Some lenders may deny a car loan application if the applicant seeks 100% financing. Consumers with bad credit may have a harder time securing subprime auto loans without making a down payment on the car.

Recommended: Auto Loan Refinance Calculator

Disadvantages of Making a Down Payment

There are certain disadvantages of a large down payment when car loan shopping. Some of those disadvantages include:

You May Be Cash-Poor

If you don’t have thousands sitting in your bank account to put down on a car, it might be a struggle to put any money down. You may need a car, but you might not be able to easily afford it if it involves a down payment. You may have to wait longer than you’d like while you set aside money so that you can afford the down payment.

Consumers may wonder what happens to car loans when someone dies. The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse or relatives may be responsible for paying the debt, or a lender may move to repossess the vehicle.

You May Not Get a Lower Rate

If you have bad credit, you might not get a lower interest rate when you make a down payment. While bad credit auto loan refinancing and subprime auto loans do exist, they don’t typically offer the best rates, so you may pay more in the long run than if you had good credit and refinanced your car loan.

5 Tips to Save for a Down Payment on a Car

If the idea of coming up with thousands of dollars for a down payment on a car seems daunting, here are five tips to help:

1. Start Saving Early

If possible, start setting aside even just $100 a month as long as you can before you want to buy a car. That way, you’ll have a nice little nest egg saved when you’re ready to buy. Saving $100 a month would get you $1,200 in a year.

2. Cut Your Spending

If buying a car is a priority, you may have to cut back spending in other areas. How much do you spend dining in restaurants? Do you really need all your cable channels? Could you lower your cell phone bill by switching providers?

Investing a few minutes to determine where you can cut back could help you find more cash to set aside for your down payment.

3. Know How Much You Need

It’s easier to save if you have an end number in mind. Shop for cars and decide whether you want to buy a new or used car. Opting for a used car, which is likely to cost less, can also help you save money. Then, research how much the model you want would cost.

From there, decide how much you want to make as a down payment. If you can pay 20% of the price and be in good shape with your monthly loan payment, you’ve got a number you can set as your target for saving.

4. Sell Your Stuff

Most of us have things sitting in our garage or storage space that we no longer use, like exercise equipment or tools. Selling things you don’t need in a garage sale or online could also help you raise some cash.

5. Create a Budget

Creating a budget that cuts unnecessary spending and promotes a frugal lifestyle can help you save for a down payment on a car. A personal budget plan can account for your expected income and your necessary expenses. You can follow the budgetary guidelines to help keep yourself on track toward meeting your goals.

Recommended: Can I Have Multiple Car Loans?

Alternatives to Making a Large Down Payment

If you can’t afford to make a large down payment, you do have a few other options that can keep your monthly payments lower:

1. Trade in Your Old Car

If you have a car you can trade in when you buy another one, it can lower what you pay. It may also mean that you don’t have to make a cash down payment. You can research the trade-in value for your car on sites like KBB, or Kelley Blue Book.

2. Take the Shortest Payment Term You Can Afford

The shorter your repayment period, the lower the interest rate you might qualify for. The average car loan length was almost 69 months for a new vehicle and 67 months for a used vehicle as of the first quarter of 2025, but if you can afford the monthly payments for a shorter period, like 36 months, you’ll get a lower interest rate. Plus you’ll pay less interest over the life of the loan than you would if you stretched out your term.

3. Pay Your Car Off Early

Paying off your car loan early can save you several hundred dollars in interest. Even if it’s a strain to pay extra on your loan each month, you’ll be rewarded with a future of no payments at all. Just be sure to check your contract to make sure there are no prepayment penalties.

Is 0% Down Ever a Good Idea?

Depending on your circumstances, putting 0% down may be a good idea for you when shopping for a car. Making a down payment might not be right for you if it depletes your savings and diminishes your quality of life.

Having a car can be a useful asset to own, even if you purchase the vehicle with 0% down. If you qualify for 100% financing and 0% APR, you may have little incentive to put any money down. As mentioned earlier, determining how much down payment to make for a car is truly a personal choice.

Buying a car is considered a need for most people. A down payment isn’t necessary if you qualify for 100% financing. Some consumers may even prefer to invest their income on something other than a down payment on a car that may depreciate in value.

Recommended: Guide to Finance Charges on a Car Loan

The Takeaway

Making a down payment when you buy a vehicle can make buying a new or used car more affordable and may help you get a lower interest rate.

If you’re not ready to buy right now but want to lower your current monthly car payment, consider refinancing. Car loan refinancing could allow you to lower your interest rate or shorten your loan term, which could save you money over the life of the loan. You could also choose to lengthen your term if you need to reduce your monthly payments, just keep in mind you’ll end up paying more in interest overall.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is it possible to put no money down on a car?

Yes, it’s possible to get auto loan financing without putting money down on a car. Consumers who qualify for 100% financing do not need to make a down payment when buying a new or used car. Your car loan in that case would cover 100% of the car purchase price, with no money down.

Are there any reasons not to make a down payment on a car?

Yes, there are some reasons why a consumer may not want to make a down payment on a car. Any consumer who cannot afford the up-front expense has a compelling reason not to put money down. The terms and conditions of your car loan, including its annual percentage rate of interest, may also provide you with a reason to forgo a down payment. If you qualify for 100% financing and 0% APR, for instance, you may have little incentive to put money down.

Is it possible to put too much of a down payment on a car?

Yes, it’s possible some lenders may not offer financing if you propose to make a down payment that the lender deems too large. For example, you might not meet a lender’s financing requirements if you’re seeking to put 90% down on a vehicle that costs $25,000. Some lenders may have minimum financing standards that prevent them from offering auto loans less than, say, $7,500.

Photo credit: iStock/Brothers91

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-066