What is GAP Insurance and How Does It Work When Refinancing Your Car Loan?
Refinancing your car loan can feel like a weight off your shoulders, lowering your monthly payments and sometimes even interest rates.
However, one question that often comes up during this process is, “What happens to my GAP insurance?” If you’ve heard about it but aren’t entirely sure what it is or how it applies when you refinance, this blog will break it all down.
What Is GAP Insurance?
GAP insurance, short for Guaranteed Asset Protection insurance, is essentially a safety net for car owners. It comes into play when your car is totaled or stolen, and your insurance payout isn’t enough to cover the remaining balance on your car loan.
Here’s how it works in practical terms. The value of your car decreases the moment you drive it off the dealership lot. Unfortunately, this depreciation often happens faster than you can pay off your loan.
If your car is deemed a total loss, your regular insurance only pays for the current market value of the car, not what you owe on the loan. This difference, often called the “gap”, can leave you in a tight spot financially.
That’s where GAP insurance steps in, covering that shortfall and offering you peace of mind during what’s already a stressful time.
How Does GAP Insurance Work?
The mechanics of GAP insurance—offered by a reputable source like RefiJet—are straightforward. If you’re in an accident that results in your car being declared totaled or if it’s stolen, your insurance company will assess the current market value of your vehicle.
For instance, if you owe $20,000 on your car loan but your car’s market value is $16,000, standard auto insurance will pay the $16,000. This leaves you responsible for the remaining $4,000. With GAP insurance, however, that $4,000 would be covered.
GAP Insurance vs Car Loan Refinancing
When you refinance a car loan, you essentially replace your current loan with a new one. This can result in a lower interest rate, longer or shorter loan term, and potentially a different lender. But what happens to your existing GAP insurance during this process?
Most GAP insurance policies are directly tied to the original loan or leasing agreement. Once you refinance, that original agreement is replaced, and your GAP insurance typically doesn’t carry over.
Factors to Consider Before Deciding
Before deciding whether to purchase refinance car loan with gap insurance or to forego it altogether, take a moment to analyze a few factors:
- Your Car’s Depreciation Rate
Some vehicles lose value faster than others. For example, luxury sedans and certain SUVs may lose 20%–30% of their value in just the first year. If your car is in this category, GAP insurance can be a worthwhile investment.
- Loan-to-Value Ratio
Compare the amount you owe on the car to its market value. If you’re refinancing to reduce this ratio (e.g., by paying a larger down payment), you might find GAP insurance less necessary.
- Cost of Coverage
How much is the premium for GAP insurance? Different providers have varying rates. Compare costs to determine if the value of coverage is worth the price.
- Personal Finances
Could you handle an unexpected financial burden if your car were totaled? If the answer is no, GAP insurance might provide a valuable safety net.
- Insurance Provider’s Terms
Not every provider offers the same terms. Double-check the fine print to understand what’s included and excluded in the policy.
