Understanding GAP Waiver (Insurance) When Refinancing Your Car

If you're considering refinancing a car loan, it's essential to understand guaranteed asset protection (GAP).

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A GAP waiver protects you from financial loss if your car is stolen or deemed a total loss — especially if you owe more on your loan than the car’s current value. GAP coverage pays the difference between your outstanding loan balance and the car’s depreciated value.

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How it works: If your car is worth $15,000, but you owe $20,000 after it’s stolen or totaled, GAP waiver insurance covers the $5,000 shortfall. Without it, you’d cover this difference — the gap between your vehicle’s value and the amount your insurance covers — out of pocket. This makes GAP coverage a crucial consideration when refinancing.

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Cars can depreciate rapidly, losing around 20% of their value within the first year. This depreciation can leave you “underwater,” a tricky situation in which your loan balance exceeds your vehicle's value.

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This article covers what you need to know about the complexities of GAP insurance and GAP waivers. This is especially important if:

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1. You already have GAP waiver or insurance and are contemplating a refinance.  
2. You’re considering GAP waiver or insurance as part of a car loan refinance.

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What is a GAP waiver or GAP insurance?

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Standard auto insurance typically covers only a totaled car’s current market value. This can pose problems if your insurance payout is less than what you still owe on your loan.

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GAP waivers can help you avoid this shortfall. It covers the difference between the vehicle’s actual value and the remaining loan balance at the time of loss.

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Borrowers opt for GAP waivers (insurance) for two main reasons:

• Depreciation protection: Cars lose value rapidly and GAP coverage can prevent you from being underwater on your loan 
• Low down payments: Financing a vehicle with little or no down payment increases the risk of your loan balance exceeding the car’s value. GAP waivers provide financial security in such cases.

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Another term you might come across when researching GAP insurance is a GAP waiver. It’s closely related to GAP insurance, so much so that some use the terms interchangeably. However, there are differences in their coverage, payment responsibilities and contractual terms:

• GAP insurance pays the difference between your car's actual cash value (ACV) and the loan balance if the vehicle is stolen or deemed a total loss in the wake of an accident. This type of policy is something you typically purchase outside your auto loan. 

• A GAP waiver is an agreement from the lender that forgives the remaining balance in the case of a total loss. It’s typically rolled directly into your auto loan by your lender.

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An example of GAP coverage in action

Picture this: You purchased a car for $25,000, fully financed with a loan. After a year, the car's value depreciates to $18,000, but you still owe $22,000 on the loan.

If your car is stolen or totaled, your standard insurance would cover only its current market value of $18,000. This leaves you with a $4,000 shortfall between the insurance payout and what you owe the lender.

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Without GAP coverage, you'd be responsible for paying that $4,000 out of pocket — for a car you can no longer use. However, GAP coverage covers that difference, ensuring you aren't stuck with unexpected expenses.

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Can you refinance a car loan with a GAP waiver (insurance)?

Yes, you can refinance a car if you already have a GAP waiver or insurance policy in place. However, it’s important to understand how refinancing will affect your existing policy.

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GAP coverage is specifically tied to your original car loan contract. This means that when you refinance, your existing GAP waiver or insurance typically does not carry over to the new loan. You’re essentially paying off the old loan and starting a new one. Since the old loan is closed, the associated GAP waiver or insurance policy often ends as well.

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Three steps to consider before refinancing your car loan with GAP waiver insurance:

1. Contact your insurer: Contact your provider to discuss how refinancing will impact your current GAP policy. Your insurer can provide details tailored to your specific situation.
2. Review terms: Find out if your GAP coverage can be transferred to the new loan or if you will need to purchase a new policy. In most cases, the coverage will not transfer.
3. Request a refund: If refinancing results in the cancellation of your GAP waiver or insurance policy, you may be eligible for a refund on the unused portion of your premium. This can help offset the cost of a new policy.

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Can you get GAP coverage when you refinance a car?

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Yes, you can get GAP waiver (insurance) when you refinance your car — and it’s an ideal time to consider insurance against your car being stolen or totaled.

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Updating or adding a GAP waiver to your car loan protects you from financial loss if you owe more than your car's current value. It bridges the gap between your loan balance and the car's actual cash value, offering essential support in case of theft or total loss.

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Here are the key steps to get a GAP waiver or insurance when refinancing a car loan:

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1. Evaluate your need: Assess whether you need GAP coverage by comparing your current loan balance to your car's value. If you owe more than its value, GAP coverage could be a good option. Valuation tools like NADA Car Values and Kelley Blue Book can help you get a sense of your car’s actual value.
2. Choose a provider: You can purchase GAP waivers or GAP insurance through auto insurance companies (often via your new lender) or third-party providers that specialize in this coverage.
3. Apply: Once you’ve chosen a provider, complete the necessary paperwork to secure your GAP waiver (insurance). Make sure the coverage begins as soon as you finalize your loan so that the protection is continuous.
4. Review your policy: After you have obtained your GAP waiver or insurance, review the terms and conditions to be certain you understand your coverage fully.

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Pros and cons of GAP waivers and insurance

If you're considering adding or replacing GAP coverage during a refinance, here’s a quick overview of the main benefits and drawbacks:

Pros

1. Financial protection: GAP coverage can provide financial safeguards in the event of theft or the total loss of your car.
2. Peace of mind: If you have a high loan-to-value (LTV) ratio or a long loan term, a GAP waiver or insurance policy can provide reassurance that you will not pay out-of-pocket costs if the worst happens to your car.  

Cons

1. Increased costs: GAP coverage can increase the total cost of your loan or add extra upfront premiums.
2. Limited usefulness: If your car’s value is close to or greater than your loan balance, you might not need a GAP waiver or GAP insurance.

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Deciding on GAP waivers and insurance

RefiJet can help you research your options and shop around for the best terms when deciding whether to include a GAP waiver when refinancing your car loan. Assess your car’s value, your financing terms and how much you owe on your loan to determine whether GAP coverage is worthwhile for you.

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FAQs

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Here are answers to some common questions about GAP waivers and insurance:

Can you get a GAP waiver or insurance refund after refinancing a car?

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Yes. Your original GAP insurance policy or waiver is typically canceled when you refinance your car loan. This may entitle you to a prorated refund for any unused portion of your policy. The refund amount will depend on your specific policy and how much time remains on the coverage.

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Will an insurance claim affect refinancing?

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An insurance claim won’t usually prevent refinancing. However, unresolved claims may disqualify you.

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Lenders assess your car’s value during the refinancing process, and severe damage or a total loss may complicate the process. Be sure to resolve any active claims before refinancing.

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What happens to GAP waiver (insurance) when you refinance a vehicle?

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When you refinance, your existing GAP coverage may be canceled or modified depending on the new loan terms.

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If you still owe more than your car’s value, you might need to purchase a new GAP waiver for the refinanced loan to retain coverage.

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