If you decide to refinance car loan agreements, you should be aware that your auto insurance premium might be affected by the process. In some case, this can actually save you money. Let’s see exactly how this works.

Factors That Affect Your Auto Insurance Premium

In order to understand the effect of refinancing on car insurance, it helps to know exactly how insurance premiums are calculated. This information is also useful for keeping your insurance premiums low in general. Your vehicle insurance premium is determined by:

  • Deductible: This is how much you agree to pay before the insurance begins to cover a claim. The higher the deductible, the lower the premium.
  • Car Make, Model, and Value: Things like overall safety and likelihood of theft influence your insurance payment. Safety upgrades can lower premiums.
  • Driving Habits: Business vehicles and long distance commuters pay higher premiums.
  • Where You Live: Car insurance is much higher in some states.
  • Driving Record: A good driving record means lower insurance premiums.
  • Age, Gender, and Marital Status: Certain categories of persons are more prone to accidents. For example, young, unmarried men pay a higher insurance rate. Conversely, car insurance for senior citizens tends to be less expensive.
  • Level of Coverage: You decide if you want comprehensive coverage or partial coverage. The higher the level, the more you pay.

How Refinancing Is Related To Car Insurance

In the list above, things like car value and coverage level might be affected by refinancing. For example, when you first bought your car the value was higher since the car was newer. Since your car’s value has declined since you purchased it, you may want to check with your insurance carrier about a lower rate.

Some lenders allow you to drop comprehensive coverage once you have paid off a certain amount of your vehicle loan. If this is the case, you might have to bargain with the new lender if you want to drop comprehensive coverage. Comprehensive coverage is insurance against damages not related to a collision with another vehicle, such as:

  • Theft
  • Vandalism
  • Fire and natural disasters
  • Falling objects
  • Damage done by animals
  • Damage resulting from civil disturbances (e.g. riots)

As you can see, dropping comprehensive coverage carries some risk, but your monthly premium will be lower if you choose to scale down your coverage in this way.

What About GAP Coverage?

Guaranteed Auto Protection (GAP) insurance covers the difference between the actual cash value of your car and the balance owed on the vehicle financing. So, if your car is worth $10,000, but you owe $15,000, GAP insurance covers the $5000 difference. There is no legal requirement to carry GAP insurance, but some lenders might require it.

When refinancing, you may find that your original lender required GAP, but your new lender does not require it, so might decide to drop your current coverage. On the other hand, your new lender might require GAP insurance as a new condition on the car loan, potentially increasing your car insurance costs.

It Pays To Ask

When you are thinking about refinancing, it pays to ask the new lender and your insurance company about the impact it will have on your car insurance. This would also be a good time to go over your coverage and decide where you might want to cut back – or add on – in terms of insurance coverage.

Save Time, Save Money

Auto refinance networks, like CARCHEX can save you time since they can contact nearly 100 different lenders to get you the best rate available.

About The Author

joeJoe Campanella is the EVP of Business Development for CARCHEX and oversees partner relationships. Joe possesses 12+ years of experience building sales/customer service teams and securing strategic partnerships. He is a sports enthusiast who enjoys mountain biking, surfing and snowboarding in his spare time.

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