8 Common Insurance Questions When Refinancing Your Car Loan

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Yes, you need car insurance to refinance a car loan. But what else do you need to know?

There are several reasons why you might want to refinance your current auto loan. Maybe your credit score has improved since origination. Credit improvements can lead to lower interest rates and, in turn, a lower monthly payment.

Maybe you made a big loan repayment recently. That could improve your loan-to-value ratio and help you get better loan terms. Or maybe you just want to check out different lenders.

Regardless, your decision to get a new car loan impacts another key auto agreement: your car insurance policy.

Lenders will require your vehicle to be legally insured before they’ll issue you a new loan.

However, there are several other insurance nuances to know as well. So, we’ve outlined eight common car insurance FAQs that may come up during the auto loan refinancing process.

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1. What Car Insurance Coverage Do I Need To Refinance My Car?

Car insurance requirements are subjective. For starters, they vary by state. If you want to know your specific requirements, you’ll need to look at your state’s laws. (Geico has a helpful tool for that.)

On top of that, auto loan lenders often require borrowers to have additional coverage. Your original loan agreement may have required comprehensive and collision coverage. And the issuer of your refinance loan could have different policies. For that reason, you’ll have to consult your new lender about their auto insurance coverage requirements too.

That said, refinancing could help you save money on insurance. Depending on your new loan amount, you might be able to drop certain coverages from your policy. That said, just because you can scale back your coverage to save money doesn’t mean it’s the best solution.

2. Do Lenders Limit Car Insurance Deductibles?

Car insurance deductibles and premiums have an inverse relationship. Typically, the higher your deductible, the lower your premium — and vice versa. However, you might not have a ton of flexibility if you want to refinance your car loan.  Most lenders require a deductible of $1,000 or less to refinance. 

If you purchase a GAP waiver or insurance, you may also be required to keep your deductible within a specified range. Otherwise, you risk having your claim declined in the event your vehicle is totaled.

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3. What Is Force-placed Insurance?

Even after your refinance loan is issued, you still have to maintain a compliant auto insurance policy throughout the life of the loan. For instance, if your lender imposes a cap on your car insurance deductible, you can’t get around it by changing it later.

Why not? Lenders are notified if insurance deductibles change while your loan is outstanding.  So, if you fail to maintain insurance coverage, your lender may charge you force-placed insurance This is a lender’s own insurance policy, which is often much more expensive than standard policies.

4. What’s an Insurance Binder?

Since lenders require car insurance to refinance, you may need an insurance binder if you recently switched insurance providers or policies.

An insurance binder is a temporary insurance contract that serves as a placeholder until your formal policy takes effect. Unlike those heavy-duty three-ring binders, insurance binders can be as short as one page. This certificate not only allows you to drive your vehicle in the interim but can also serve as proof of insurance for refinance loan purposes.

5. How Do I Update My Car Insurance Policy With My New Lender?

Although it depends on your car insurance provider, you should be able to replace your old loan issuer with your new lender on the declarations page of your insurer’s website.

If you go through an auto loan refinance platform (such as RateGenius), this will be handled for you as part of the service. However, some insurance companies require the customer to call the service line instead.

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6. Do Co-borrowers Need To Be Named Insured Drivers?

Not everyone has a positive history with credit cards. If you don’t, that’s okay. You can increase your chances of qualifying for a refinance loan by applying with someone who has a strong credit history and a high score. That’s where co-borrowers and cosigners come into play.

If you take the former approach and fill out a loan application with a co-borrower, you’ll both be equally responsible for loan payments. But there are car insurance implications too.  Lenders may require all co-borrowers listed on the refinance loan to be also listed on the insurance policy.  That said, there can be exceptions on a case-by-case basis.

7. Should I Get New Car Insurance When I Refinance?

Tons of financial institutions offer auto loans, such as banks, credit unions, and online lenders. Naturally, it’s smart to compare different lenders and their loan offers. But why not shop around for other car insurance policies too? You might even get a lower rate.

Insurance companies each have their own underwriting guidelines. So, changes in credit scores (in most states), driving history, or other factors can impact how much you pay for car insurance. It’s worth checking out sites like Gabi or The Zebra (or an independent insurance agent) to compare rates and ensure you’re getting covered at the best price.
What rate can I get? What rate can I get?

8. What Insurance Documents Do I Need To Refinance My Car?

To refinance your current car loan, you’ll provide your new lender with several documents. That includes your driver’s license, registration, proof of residency (through a utility bill or lease agreement,) and proof of income (e.g., pay stubs). From an insurance perspective, you’ll also share proof of insurance.

But what if you recently switched to a new insurance policy? You can use an insurance binder in place of a formal policy for the time being.

Car Insurance Is Subjective

Just as personal finance is subjective, your car insurance needs are subjective too.

Your state will have minimum car insurance requirements. So will your new lender. It’s important to be aware of these mandates, as they’ll impact your auto refinancing process and potential claims. But that doesn’t mean you should neglect your personal preferences. If you feel more comfortable with more coverage, that should factor into your policy decisions.

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About The Author

Carter Kilmann

Carter Kilmann is a personal finance writer and editor for hire, covering topics like credit cards, mortgages, budgeting, banking, and investing. He's written for The Points Guy, Investing.com, Thrive Global, Day to Day Finance, Money Mini Blog, and more.

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