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When you bought your current vehicle, you may accept also purchased gap insurance. If you're at present thinking most refinancing the car, you may be wondering how that affects that gap insurance policy. Practise you become a gap insurance refund after refinancing? Or can that insurance be transferred from the original loan to the refinanced one? These are but some of the questions that you may have about gap insurance when you're refinancing your car. This commodity volition answer these and other ordinarily asked questions on the subject and explicate more than information most the process. What is Gap Insurance and How Does It Work?
Gap insurance is a type of supplemental machine insurance. It can kick in if the vehicle you own is stolen or totaled before your machine loan is paid off. The insurance then covers the difference between what your auto insurance policy pays out and the amount that y'all all the same owe on the vehicle. Thus, this policy is specific to the covered vehicle and to the loan you took out to purchase that vehicle. Typically, yous pay for it in ane lump sum upfront simply in some cases, yous may make monthly payments. So, why do people get gap insurance? - Yous got 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 more than quickly than average.
- You fabricated a modest or no downwardly payment. You lot may take purchased gap insurance if you didn't pay a downwardly payment (or paid simply a minor i) and chose a long loan term. In this situation, there's probably going to be a menstruation of time when y'all could owe more on the vehicle than it's currently worth.
In both these scenarios, gap insurance can provide coverage for the departure betwixt what the car is actually worth and what your regular motorcar insurance would pay out on information technology. Notation that, although you tin can buy gap insurance at the dealership where yous become your vehicle, you tin can too talk to insurance agents to see what it would cost through them. When you add together information technology to your current motorcar insurance policy, rates are typically lower. An Example of How Gap Insurance Works
As a high-level example of how gap insurance could work, continue reading. Permit's say: - You're buying a car for $30,000.
- Y'all put v% ($one,500) downward and borrow $28,500.
- At a 4% interest rate for a half dozen-year term, your monthly payment is nigh $445.
- Later on a year, your outstanding balance would be well-nigh $24,200.
- With a depreciation charge per unit at xx%, the value of the automobile at that fourth dimension would exist about $19,200.
If the vehicle is totaled and y'all have standoff insurance that will encompass the current value of your car, you at present accept no car and y'all still owe about $5,000 ($24,200-$19,200) on the vehicle loan. Gap insurance is intended to cover that difference and so y'all won't have an outstanding balance on the loan from a previous vehicle when y'all need to shop for a new one. Gap Insurance Refunds
Under sure circumstances, you lot tin 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 yous will accept paid off the quondam loan with a new one, you may exist entitled to a refund, again, only if y'all paid for a gap policy in total upfront.
- Sure that the loan balance is less than the insurance coverage yous have on the vehicle, ideally by at least a couple of m dollars.
If you lot're in whatsoever of these situations or if other circumstances make you wonder whether you're entitled to a refund, contact your insurance agency. Y'all'll need to provide your policy number and verification of the situation that may entitle y'all to a refund—for example, that you've sold your car. In that example, you lot can provide your insurer with paperwork that demonstrates proof of sale. Requirements for cancellation can vary by land and by insurance company and policy, so discover out what else is needed so you tin provide that, too. Again, notation that these situations apply when you've paid for your unabridged gap insurance policy upfront, non when you lot pay a monthly gap insurance premium. What Happens to Gap Insurance When You Refinance an Auto Loan?
When y'all're refinancing a machine loan on a vehicle that has gap insurance coverage, you're refinancing the loan on the vehicle, not the gap insurance. That's considering 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 consequence. 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. Even so, y'all may want to buy a new gap insurance policy that volition 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, inquire 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 motorcar's value or the numbers are fairly close together, decide whether it makes sense to go a new gap insurance policy. If you owe more than than the vehicle's value, is this a number that you lot 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:
Yous can: - Lower your interest rate and/or your monthly payments.
- Get a different loan term.
- Gratuitous upward money to pay down other debt.
- Switch lenders if yous aren't happy with your current one.
Cons:
Y'all may: - Need to pay a prepayment penalization if you pay off your current loan early. Bank check with your lender to encounter if that clause is in your car loan contract.
- Need to pay fees for the new loan.
- Experience a temporary dip in your credit score.
- Struggle to find a lender who volition refinance your car if it'southward more than x years onetime or has 100,000 miles or more on it, or if the loan is less than $7,500 or more than $100,000.
The all-time time to refinance auto loans will differ for everyone, and each person's private needs volition decide how long to wait before refinancing. If yous can get a lower interest rate, then it oftentimes makes sense to refinance. If you're struggling with loftier payments, a lower interest rate can aid. So tin can refinancing for a longer term although you may pay more in interest over the loan's life that mode. In that location is no 1 "right time" to refinance. Mostly, it depends upon your personal fiscal situation. Having said that, some banks may require that you keep your old loan for a period of time, maybe six months, before it will refinance the vehicle. If you still desire to refinance, in that scenario, you'd demand to seek out a new lender. Whatsoever you're wondering, don't be afraid to inquire questions when refinancing. To aid y'all make sense of the industry lingo that yous may hear, you might desire 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 motorcar is totaled or stolen. There are times when you lot 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, yous tin can decide whether to go a new gap policy on the new loan. When y'all are looking to refinance an auto loan, Lantern by SoFi can help. Make full out one simple form to learn about vehicle refinancing.
Photo credit: iStock/bankrx The tips provided on this website are of a general nature and do not take into business relationship your specific objectives, financial state of affairs, and needs. Y'all should always consider their appropriateness given your own circumstances. SOLC0921179
About the Author
Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. Every bit 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.
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