What Happens to GAP Insurance if You Refinance?

Many consumers make a small down payment or none at all when they purchase and finance a vehicle. Due to depreciation, a gap exists between the value of the vehicle and the loan balance during the first two years of the loan. To protect themselves and the borrowers if a vehicle is declared a total loss, lenders offer guaranteed asset protection (GAP) insurance in connection with an auto loan.

How GAP Insurance Works

A car accident can damage your vehicle beyond repair. An insurance company then declares it a total loss, determines the market value of the vehicle and pays that amount on your loan. However, if you have a new vehicle that is less then two years old and you did not made a large down payment when you purchased it, chances are you owe more than the vehicle is worth. Thus, you have a gap between the insurance payment and the loan balance. GAP insurance would cover that difference so you would not have to.

Refinancing a Loan

GAP insurance is connected with an auto loan. When you pay off the loan or refinance it, GAP coverage ends automatically. When refinancing, you will need to purchase a new GAP policy and pay the full fee, although you may receive a prorated refund from the insurance company. Your lender will provide the form to fill out. Additionally, the insurance company may charge a refund processing fee, which it will withhold from the total due to you. When a lender issues a new policy, it will send you a new GAP contract.

Types of GAP Insurance

Lenders may offer different types of GAP insurance, including GAP and GAP Plus. A GAP Plus policy offers the same protection as GAP, and also offers the consumer $1,000 towards the next vehicle purchase after a vehicle loss, although some restrictions may apply. A GAP Plus policy, meanwhile costs about $100 more than GAP, and coverage costs may also vary. Dealerships generally charge higher fees, while credit unions often offer the same policies for much less.

Paying for GAP Coverage

You can pay for GAP coverage with cash, a check, a credit card or a bank account transfer, and the lender may include the fee in your car loan monthly payments. If you cancel GAP coverage any time during the life of the loan, your loan payments will not automatically decrease. To lower payments, the creditor would need to refinance the loan. When purchasing GAP coverage, it's a good idea to ask about a cancellation policy. Most companies will offer a full refund when cancelled within 60 to 90 days of the purchase date. Some may offer a prorated refund after that, while other companies will not issue any refund after 90 days.