There are plenty of things to consider before you refinance a car. How will your payments change? How will the new loan impact your credit score? And, another key question, how will refinancing a car affect your auto insurance premium?
The answer is that there is no direct correlation between refinancing a car and auto insurance premiums. Your car insurance company doesn’t care how much you still owe on the vehicle as long as you’re paying for the level of insurance coverage you decided to purchase. Indirectly, however, your premiums can definitely change after you refinance.
Refinancing a car might mean you need to purchase gap insurance, which would increase your auto insurance premium. Gap insurance provides protection when you owe more on a vehicle than it is worth, which is a common issue for refinanced cars.
Let’s say you only owed $10,000 on a car you purchased a couple years ago, but you decide to refinance. Now you owe $15,000, but your car is valued at $12,000. This means that, if you were to total the vehicle, the insurance company would pay you a maximum of $12,000, and you’d have to cover the remaining $3,000 to pay off the loan.
This is just an example, and the discrepancy between the two numbers can be much larger. When refinancing a car, make sure you have sufficient insurance to cover you in a total loss. Otherwise, the additional money must come out of your pocket.
In this scenario, refinancing a car won’t increase your auto insurance premium by an extraordinary amount, but it is an expense you should consider. Ask your insurance agent how much gap insurance costs and whether you can add it to your current policy.
Finance Company Requirements
When refinancing a car, the lender wants reasonable assurance that they will not suffer a loss after you drive the car off the lot. This is why most financing companies require borrowers to carry specific levels of auto insurance, usually above the state-required minimum.
Refinancing a car might mean you have to buy additional coverage, which would mean an increased auto insurance premium. For example, under your previous loan, you might have been able to drop comprehensive coverage after you paid a specific portion off. Now that you’re refinancing, however, you might have to re-purchase comprehensive to meet the lender’s requirements.
The same is true when moving to a different lender, who might have different requirements from your initial lender. It is important to ask these questions before refinancing a car, and to talk to your insurance agent about how much your auto insurance premium will increase.
Knowing how your auto insurance premium will be affected can make a difference in whether refinancing your car is the best decision. If you’ll wind up paying more for insurance than you save by taking out a new loan, it might be best to stick with your current arrangement with the lender.
“Car gap Insurance,” Bankrate.com.