Refinancing a Car & Gap Insurance

by Lee Nichols

    Wrecking your car or having it stolen is bad enough -- it's no consolation to hear that your insurance policy covers only a portion of your loan. Without a gap policy, your lender looks to you to pay the balance. Whether you need gap coverage when you refinance a car depends on whether you're upside down on your loan.

    What Is "Gap"?

    Gap insurance pays the difference after a total loss when you owe more on your car than it is worth. In that case, your insurance company will declare your vehicle a total loss and will pay the cash value of the car to you or the lender. Gap policies pay any remaining balance and keep you from still owing money on a car that you no longer have.


    While refinancing can lower your payment by reducing your interest or extending your repayment terms, it can also cause you to be upside down on your loan. If you had gap coverage on your original loan, it does not extend to your refinance loan. Ask your insurance agent what the company will pay for a total loss. If the amount quoted is less than your refinance loan, consider adding a new gap policy to protect you from a loss.


    The cost of a gap policy depends on where you get it. When it's purchased from your insurance company, expect to pay between 5 and 6 percent of your insurance policy's premiums, according to Fox Business. For example, if your premium is around $1,000 per year, your gap policy will add about $50 to your premium. At publication, Penn State Federal Credit Union charges a flat $325 for gap insurance. However, if you finance your gap premium with your loan, you will pay interest on the premium.


    Before opting for gap coverage because the lender providing the refinance loan suggests you need it, recommends shopping around for a policy. Read your primary policy's contract to ensure that you need a gap policy. Talk with the gap provider about what the policy covers and what it doesn't. Determine if the gap policy does not limit what it pays and instead covers the full amount you need to pay the loan's balance.

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