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Can I get GAP insurance refund when my car is paid off?

Here's what you need to know...
  • When you purchase a new vehicle, its value begins to decrease, or “depreciate”, immediately
  • Gap insurance bridges the “gap” between what you owe on a vehicle and the vehicle’s depreciated value
  • You can get a refund on a portion of your gap coverage if you pay off your loan early

Vehicles depreciate after they are purchased, and this depreciation can take a severe hit on your wallet if you file an insurance claim while the vehicle is still somewhat new.

When you are buying a brand new car, the car loses an estimated 9% of its value just 1 minute after the contracts are signed. The car will only continue to depreciate throughout the years to come, and will retain only 49% of its value after 4 years.

You cannot avoid depreciation, but you can negotiate the sales price and also select add-on features that offer protection for a good price. Some features help ensure that defects are repaired and others ensure that your car loan can be paid off without penalty.

It is up to you to select the right features and shop around for others that you can purchase after you drive the car home. Start comparing car insurance rates now by using our FREE tool below!

One add-on feature you will be offered if you are financing the car is gap insurance.

  • Gap insurance is a special form of supplemental coverage that will help fill in the gaps between insurance payouts and loan balances that are caused by depreciation.
  • This supplemental coverage is only available for vehicles that are owned by a finance company. The protection will give you peace of mind and also protect your bank account if you do experience a total loss.
  • While you may intend to finance the car at the time of purchase, you may decide that paying off the principal is the best financial decision to make when you have the money.

When you do this, you might wonder if the premiums that you have paid towards gap insurance for the term of the loan will be refunded to you in the form of a check.

Read on, and find out more about how gap insurance works, whether or not you are entitled to a refund and other alternatives that are available to you.

What is gap insurance and how does it work?

Young woman buying new car

Gap insurance is a supplemental form of protection that you can buy in addition to standard car insurance coverage to pay for the difference between the depreciated value of a car and the balance of the loan on the vehicle.

It is called gap insurance because in essence it covers the gap between worth and what is owed.

If you need further explanation, you will need to understand how auto insurance carriers value vehicles and how this value will differ from your principal on your loan.

You may not see the importance of carrying supplemental protection to pay off your loan if you do not really understand how claims valuations are calculated.

Here is a brief explanation:

How a Vehicle is Valued After a Loss –

Insurance companies are not going to simply pay off your loan when you file a claim and the vehicle is a total loss. Instead, they are going to do their research to determine how much the car was worth at the time of the incident.

The insurer is only responsible for paying up to the Actual Cash Value of the car if it is totaled or needs significant repairs. Actual Cash Value, in simple terms, is the retail value of the car minus depreciation.

How the Claims Settlement Amount Differs from Your Loan Balance –

Unless you put down a large deposit, you will more than likely be upside down in your loan from the moment you drive off of the lot.

You are considered upside down in a loan when you buy a brand new car because it depreciates once you drive it off the lot, and the car is worth less than the amount you financed.

When you owe more than your car is worth, it will only affect you if your car is severely damaged in an accident and you have nothing more than standard cover.

If this were to happen, the insurer will only issue a check for the actual depreciated value of the car minus your deductible.

Whatever is left on your loan is your responsibility. This is especially frustrating when you need to buy a new car and are still left paying off your old loan for a car you cannot drive.

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When is gap insurance a good investment?

If you are financing a car with no down payment or a small down payment of 10% or less, it is in your interest to buy gap cover. One of the major advantages is that you will not have to pay thousands out-of-pocket for a total loss, even if you are at fault.

It is also in your interest to have the coverage if you have a longer loan term between 5 and 7 years since this is when cars are worth half of their original value.

If you put a large down payment, plan on paying off your loan immediately, or you get a great deal on the sales price, gap insurance may not be necessary. You should know the advantages and disadvantages before you make a choice at the dealership.

Can you cancel gap insurance purchased with your loan?

If you pay your vehicle off early, you will be entitled to a partial refund for the gap insurance that you did not use. When you are financing your car in the finance office, the premiums for coverage are calculated based on the purchase price and the loan term.

If you reduce the loan term, you will not get all of the coverage that you paid for in your loan.

Because of this, the company must refund you all of the premiums that were not used. You must notify the insurer and show them a payoff notice in order to have the check issued.

Alternatives to Dealer Gap Insurance

Close up of man opening car door with key.
You are not obligated to buy gap insurance at the dealer. Many standard car insurers offer their own coverage for newer cars.

Ask about this option, and you can simply add on gap insurance when you add the car to your policy. The benefit is that when the car is paid off the coverage can be removed.

If you want to find car insurance with a supplemental gap option, you can start by using our FREE comparison tool below!

By using this tool for comparing costs, you will be able to see how much gap will cost you with each insurer and compare the coverage premiums to the costs through the dealer’s finance department.

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