Refinancing your auto loan can be a smart financial move, but it may also affect your existing gap insurance coverage. If you’ve paid off your original loan or switched lenders, you might be eligible for a refund on the unused portion of your gap insurance.
Understanding how and when to request that refund can help you recover money you might otherwise leave behind. Here’s what you need to know about getting a gap insurance refund after refinancing.
Key Points
• Gap insurance will protect you if the vehicle is totaled or stolen, and the insurance payout doesn’t cover the remaining loan balance.
• When you refinance your auto loan, the original GAP insurance or waiver—typically tied to the initial loan—does not transfer to the new loan.
• If you paid for GAP insurance upfront and refinance your loan, you may be eligible for a prorated refund of the unused portion.
• To request a refund, contact your GAP insurance provider after completing the refinance.
• After refinancing, if you still owe more on your vehicle than its current value, it’s prudent to consider purchasing new GAP insurance.
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.
Reasons why an auto loan borrower may consider gap insurance include:
• Getting a vehicle that depreciates quickly. 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 faster than average.
• Making little to 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.
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An Example of How Gap Insurance Works
As a high-level example of how gap insurance could work, 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 of 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 your car loan for a lower interest rate or lower monthly payment, because auto refinancing pays off your old loan with a new one.
• Carrying a loan balance that 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, insurance company, and insurance 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.
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What Happens to Gap Insurance When You Refinance an Auto Loan?
When you refinance 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 Pros and Cons
There are several pros and cons of car refinancing, including the following:
Pros
Pros of auto loan refinancing:
• 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
Cons of auto loan refinancing:
• 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 if the refi lender conducts a hard pull inquiry into your credit report.
• Struggle to find a lender who will refinance a high-mileage car, a car older than 10 years, or an auto loan balance of less than $7,500 or more than $100,000.
Other Points to Consider When It Comes to Refinancing
• The best time to refinance auto loans will differ for everyone.
• 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 or longer loan term can help.
• Refinancing for a longer term can give you a lower monthly payment, but you may pay more in interest over the life of the loan.
• It may be possible to have someone take over your car loan.
There is no “right time” to refinance. Mostly, it depends on 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. Lenders can explain the auto loan refi process and disclose any fees that might be involved.
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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, including if you choose to refinance the vehicle. And when refinancing to a new loan, if the lender doesn’t require gap insurance, you can decide whether or not to get a new gap policy on the new 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
Does gap insurance stay even if you refinance?
No, gap insurance ends when your loan is paid off, including when you refinance. Gap insurance is tied to both your vehicle and your loan, so by refinancing, you’re essentially paying off the old loan with the new one and therefore ending your gap insurance coverage.
How big will my refund be?
Your gap insurance refund is determined by how long you have left on the policy. If you have 10 months remaining on the policy, for example, you’d get a refund for those 10 months. Keep in mind refunds are only given to those who have paid their policy in full. If you’re making monthly payments on your gap insurance coverage, you would not be entitled to a refund.
Do I have to request a refund or is it automatic?
You’ll most likely have to contact your policyholder to request the refund. While it may be automatic, it’s always best to touch base to make sure there’s nothing additional you need to do on your end to receive the refund.
Photo credit: iStock/bankrx
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