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Refinancing your current auto loan can impact your extra coverages.
When car owners consider getting new auto loans, they have a lot of questions:
Do I qualify for a refinance loan?
How does refinancing affect my credit?
Will refinancing lower my interest rate?
How soon can I refinance after buying a car?
Finding the lowest interest rate is important. So is knowing how to navigate the auto refinance process when you have bad credit. But there’s one question many don’t think to ask:
If I refinance my car will I lose my warranty, vehicle service contract, or gap coverage?
If you took the safe route and purchased extras like the ones above, you should know what happens to them before you refinance your auto loan. So, we’ve compiled a quick reference guide to help you determine what extras carry over and what you’ll need to renew.
First, let’s start by overviewing the various types of extras.
A warranty is a manufacturer’s promise that your vehicle will meet quality and performance standards. This is known as a manufacturer warranty or a factory warranty. In other words, when you buy a car, it should function as you’d expect it to. If you drive a new car off of a lot, you shouldn’t be responsible if the battery sputters and dies moments later.
Warranties aren’t exactly considered extras because they’re usually included in a vehicle’s purchase price. But it’s important to understand what a warranty is so that you can differentiate it from other types of coverage, such as a vehicle service contract (more on that below).
For new vehicles, warranties typically last for a predetermined amount of time or mileage, such as three years or 36,000 miles. For used vehicles, your warranty — if you have one — can depend on several factors, such as the state you purchased the vehicle or whether you purchased privately or from a dealer.
To give you an example, Connecticut’s used car lemon law dictates that used vehicles purchased for $5,000 or more have a warranty lasting 60 days or 3,000 miles, covering all parts and labor. However, most states don’t have lemon laws for used car purchases.
No, if you refinance your current auto loan, you will not lose your manufacturer warranty — assuming you’re still within its thresholds. Your manufacturer’s promise that your vehicle will function as expected doesn’t disappear simply because you take out a different loan.
Even if you refinance your vehicle into someone else’s name, the manufacturer’s warranty would still be in effect.
But what about an “extended warranty”? In this case, the more appropriate term is vehicle service contract.
Vehicle service contracts (VSCs) are add-ons car buyers can purchase to protect against certain repairs or services. While it depends on the contract, VSCs are typically comprehensive, covering everything from engine assembly to water pump replacement.
You’ll often see the term extended warranty used interchangeably with vehicle service contract, but these aren’t one and the same. To truly be a warranty, it must be offered by your vehicle’s manufacturer.
Unlike warranties, VSCs are considered extras, so they’re not included in your vehicle’s price. How much you pay for a VSC will depend on several factors, such as the contract’s term, mileage limit, and deductible. Your vehicle’s year, make, and model impact pricing too.
These contracts function like insurance plans with monthly payments and deductibles. When assessing a VSC, double-check if the deductible is on a per-repair or per-visit basis. It can make a big monetary difference.
For example, let’s assume your VSC has a $100 deductible and you need a mechanic to repair four parts of your car. If you have a per-repair plan, you’ll pay $400 to have each part fixed. On the other hand, if you have a per-visit plan, you’ll only pay $100.
VSCs are also different from warranties in the sense that this coverage can be added at any point in time — such as when you purchase your vehicle, when you refinance, or later on.
You can even get a VSC for a car with high mileage. Let’s assume your car has 120,000 miles. If you purchased a four-year, 48,000-mile VSC, you’d have coverage for another four years or until you surpass 168,000 miles.
Lastly, before you purchase a VSC, consider obtaining a transferable plan. It can improve the resale value of your car. Or, in the event you want to refinance your vehicle into someone else’s name, you can transfer the VSC as well.
No, not unless your particular VSC states otherwise. Even if you rolled your VSC into your original loan payment, your refinance loan would simply pay it off and your plan would still be in place.
For example, let’s assume you purchased and financed a used truck. Since your down payment was minimal, you decided to play it safe and enter a VSC with the dealership. Now, you want to refinance your existing loan to get a lower interest rate. Your new loan would pay off the current loan, including the VSC.
In short, you already purchased your VSC. Your contract shouldn’t be nullified if you refinance the car loan you used to initially pay for your VSC. The dealership still owns and is obligated to the contract.
Guaranteed asset protection (GAP) protects car buyers in the event their car is irreparably damaged and deemed a total loss. As the abbreviation aptly implies, GAP coverage can help you cover the gap between your outstanding car loan balance and your insurance payout on your totaled car.
When is this beneficial? In the event your car is totaled, an auto insurance policy will only pay you for your vehicle’s actual cash value (ACV), which accounts for age, mileage, and condition. Since vehicle values typically depreciate over time, your payout isn’t guaranteed to cover your outstanding car loan balance.
So, even though GAP coverage is optional, it can help get you out of financial binds.
Now, let’s look at the two forms of GAP coverage: GAP insurance and GAP waivers.
GAP insurance is just that — a standalone insurance policy. So, you’ll have a monthly payment and a deductible. Higher deductibles mean lower monthly payments and vice versa.
Should your car ever be totaled, you’ll have to file a claim. Let’s walk through an example.
Your car is totaled in an accident, and your current loan amount is $15,000 — but the ACV of your vehicle is only $10,000. Since you have GAP insurance, you can file a claim with your provider. If approved, the insurance company will pay the difference to your lender (after accounting for your deductible) — and you’re off the hook for the remaining loan balance.
Although GAP insurance can be purchased at any time, insurers may require you to be the vehicle’s original owner (i.e. the original loan is in your name). So, if you refinance your vehicle in someone else’s name, they may not be eligible for GAP insurance.
Although they’re similar in name, GAP insurance and GAP waivers are two different types of policies. The primary difference is how they cover the proverbial “gap” between your car’s ACV and your car loan balance.
GAP waivers aren’t standalone insurance products — they’re offered by your lender or a third-party financial institution when you take out your auto loan or refinance loan. Instead of paying a monthly payment, you’ll pay a one-time upfront fee. On average, this is between $500 and $700, which you can pay for all at once or roll into your loan.
If your car is ever totaled, your GAP waiver provider can waive your outstanding car loan balance, subject to loan-to-value and total dollar thresholds. For instance, your policy may cover up to 150% of your vehicle’s LTV and up to $50,000.
Let’s apply a GAP waiver to our earlier example.
Your car is totaled in an accident, and your current loan amount is $15,000 — but the ACV of your vehicle is only $10,000. Your GAP waiver covers up to 150% of your vehicle’s LTV and up to $50,000. Assuming your incident is eligible, your GAP waiver provider will waive the difference since it falls within your coverage’s thresholds.
Keep in mind, most GAP waivers will require you to have collision or comprehensive auto insurance coverage.
Typically, GAP coverage is tied to a specific loan agreement, so it’s good for the life of the loan. However, taking out a new loan would void your existing coverage. This would apply to both GAP insurance and GAP waivers.
Fortunately, you can still get a refinance auto loan with GAP coverage. While you may need to be the original owner of the vehicle to get GAP insurance, you can still apply for a GAP waiver when you go through auto loan refinancing.
There are a lot of factors borrowers must consider when they refinance their vehicle loans — credit scores, credit history, prepayment penalties, lenders, and interest rates. But don’t forget to consider the impact of refinancing on your extra coverage.
Don’t hesitate to reach out to your current lender or provider to verify your policy and loan terms. That’s the best way to get the most relevant information and insight into your personal situation.
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