Can You Cancel Gap Insurance From A Dealership

Can You Cancel Gap Insurance From A Dealership

Many car buyers are pushed into purchasing GAP insurance when financing a new vehicle. Short for “guaranteed asset protection”, GAP covers the difference between insurance payout and remaining loan balance if the car is totaled. But can you cancel this common dealership add-on if you change your mind or no longer need the coverage?

Fortunately, GAP insurance can usually be cancelled even after leaving the dealership lot. Successfully cancelling and receiving your refund takes some diligence, but it allows you to undo an unnecessary expense. Let’s examine GAP insurance basics, cancellation rights, steps to cancel, and when keeping coverage might be the wiser choice.

Understanding GAP Insurance

GAP insurance is marketed by dealers as a supplement to regular car insurance when you finance or lease a vehicle. If the vehicle is totaled, standard insurance will only pay the current depreciated value, not what you owe the lender.

GAP covers the difference, protecting you from owing thousands on a car you no longer have. The coverage amount is the difference between primary insurance payout and remaining loan balance. GAP is generally optional but dealers push it heavily, earning large commissions.

It can add $300-$700 to the car payment over a typical 5 year loan. Some lenders also require GAP for loans with little money down. But GAP makes more sense for some situations versus others. Carefully read the cancellation policy before purchasing so you can react if it becomes unnecessary.

Understanding Gap Insurance
Understanding GAP Insurance

Reasons to Cancel Gap Insurance

The coverage is duplicative if you already have “new car replacement” on your existing auto policy. This provides coverage for the replacement cost rather than depreciated value. The dealership failed to adequately explain the limitations, exclusions, and cancellation rules at the time of purchase.

You initially financed more than the actual value of the vehicle, but have since paid down the principal loan balance to an amount closer to the car’s value. You simply changed your mind and decided the extra monthly cost was unnecessary for your situation.

You are confident that you can cover any gap between insurance payout and remaining loan balance in the event of a total loss. You plan on keeping the vehicle long term until the loan is paid off, reducing the need for gap protection.

No matter what the reason, you can choose to cancel gap insurance once purchased from the dealership’s finance department. There are specific steps to take for a successful cancellation and refund.

Reviewing Your Right to Cancel

GAP cancellation rights depend on whether it was purchased through the dealer or lender:

Dealer GAP plans often have a free look period where you can cancel with full refund within 30 days. This window is required in many states. Lender GAP plans may only offer refunds in cases of early loan payoff or if the policy was duplicated with another plan. Limited cancellation rights exist.

After the initial window, pro-rated partial refunds may be possible with some dealer or lender GAP plans. Less expensive “self-purchased” GAP plans bought separately typically offer better cancellation provisions.

Reviewing Your Right To Cancel
Reviewing Your Right to Cancel

How to Cancel Your GAP Insurance

If within the initial cancellation period, here are the basic steps:

Review cancellation procedure in your GAP contract and follow all instructions. A physical form may be required. Notify the GAP provider in writing and send via certified mail. This is usually not the dealer. If financed into your auto loan, notify lender to stop GAP payments.

Request written confirmation of cancellation and any pro-rated refund amount owed. If no refund received within 30 days, persist with written and phone follow-up. File a complaint with your state insurance department if unlawfully denied cancellation or refund.

Canceling Gap Insurance Through the Dealership

Most auto financing gap agreements allow a cancellation period ranging from 30 to 90 days. Policies issued in certain states may have different cancellation rules. Be sure to review your gap policy paperwork for specific cancellation details.

Here are some general guidelines for canceling gap insurance through the dealership:

Review your contract – Carefully read the terms of your gap policy to understand any waiting periods, deadlines, and procedures for cancellation. Also confirm if a partial refund of unused months will be issued.

Contact the dealer – Notify the finance manager at the dealership where you purchased the vehicle and gap policy. Let them know you want to cancel it effective immediately. They will advise if any cancellation form or letter is required.

Submit written request – Most dealers require written notification of your intent to cancel gap coverage. This creates a paper trail for your records. Keep a copy of any letters or forms you send for cancellation. Send communications by certified mail for proof of receipt.

Obtain refund details – Ask the dealer to provide confirmation once they receive notice of the cancellation request. Get specifics on how much of a refund will be issued to your auto loan balance. Refunds typically take 4-6 weeks to process but may vary.

Notify lender – Contact the bank or lender that financed your vehicle purchase. Alert them that you have requested cancellation of the gap insurance with the dealer. This helps ensure the refund is applied properly when processed.

Review loan statement – Examine your next monthly auto loan statement to verify the gap refund was credited. It will appear as an adjustment lowering your overall balance. If not applied after 6-8 weeks, follow up with the lender.

Consider alternatives – If beyond the dealership’s cancellation window, you may still be able to cancel by contacting the actual gap insurer listed on your policy. Also consider a lower cost gap policy from your insurance agent.

Canceling add-ons like gap insurance directly through the dealership is possible in most situations if done soon after purchase. Just ensure you follow the specified cancellation process and document the refund details. With persistence, you can potentially save hundreds of dollars in unnecessary insurance premiums.

Canceling Gap Insurance Through The Dealership
Canceling Gap Insurance Through the Dealership

alternatives to cancellation

Even if past the cancellation deadline with the car dealership, there are still options for getting rid of an unwanted gap insurance policy. You can try canceling directly through the insurance company listed on your policy, since they may allow cancellations anytime.

Another option is to replace the dealership’s gap coverage by shopping rates from your own car insurer or independent providers, allowing you to cancel the original policy. When refinancing your auto loan with a new lender, you can exclude gap

coverage in the new loan to effectively cancel the old policy. If the dealer refuses to cooperate with a cancellation request within their advertised timeframe, you can file a formal complaint with your state insurance department. Finally,

making extra payments to pay down the loan principal faster allows you to cancel gap insurance once you reach a certain loan-to-value ratio, usually when the balance is 125% of the car’s value.

Getting Your GAP Refund

Once cancellation is confirmed, you should receive any applicable refund within 30-60 days via:

  • Check mailed directly to you
  • As a credit on your financing loan account, reducing the principal
  • Direct deposit if that was an option when purchasing

By law, no fees can be deducted from a GAP refund in most states. Appeal any discrepancies.

Getting Your Gap Refund
Getting Your GAP Refund

When Keeping the GAP Policy Makes Sense

While canceling an unnecessary GAP policy to pocket the premiums paid often makes perfect sense, there are situations where keeping it is wise:

  • You made a very small down payment of less than 20% on your vehicle loan.
  • You have a long 6-7 year loan term with slow equity build-up.
  • You got 0% financing with no down payment.
  • Your car model depreciates substantially making loan upside-down likely.
  • You live in an area with high accident rates and theft probability.
  • You have poor self-control with insurance deductibles, often selecting high ones.

So before rushing to cancel, analyze if your loan-to-value ratio and risk factors mean GAP protection could prove useful down the road after all.

Canceling GAP Insurance: Common Fees and Penalties

Potential Fees When Canceling GAP Insurance

Canceling your GAP insurance policy may involve certain fees and penalties deducted from any refund amount:

Cancellation Fee

  • Some insurers charge a cancellation fee, typically ranging from $50 to $75.

Administrative Fee

  • The insurer may deduct a small administrative fee to process and handle the cancellation, usually $25 to $40.

Outstanding Premium

  • If canceling mid-policy, you may owe premium amounts that were being financed and remain unpaid.

Pro-Rata Refund

  • The refund may be pro-rated based on the time or mileage remaining on the original policy rather than a full refund.

Short Rate Penalty

  • If canceling mid-term, a short rate penalty that assumes faster upfront premium payment may reduce the refund amount.

Other Potential Deductions:

  • Non-refundable upfront policy fees
  • Finance charges if GAP was added into the auto loan
  • Lender penalties if GAP was required for the loan
  • No refund at all beyond the initial cancellation window

By understanding these common fees and penalties upfront, you can cancel your GAP insurance appropriately and ensure you receive the maximum refund owed.

Canceling Gap Insurance: Common Fees And Penalties
Canceling GAP Insurance: Common Fees and Penalties

Balance Adjustment and Its Role in GAP Insurance

A balance adjustment is a process related to GAP insurance cancellation where the remaining balance owed on the auto loan is reduced to account for the refunded GAP premium.

When GAP insurance is cancelled, any refund due is typically sent directly to the lender, since the policy was likely financed as part of the auto loan.

The lender will then apply this GAP refund amount towards the loan balance, lowering the remaining principal owed. This is known as a balance adjustment.

For example:

  • Original Auto Loan Amount: $20,000
  • GAP Insurance Premium Financed: $500
  • Remaining Loan Balance: $18,000
  • GAP Insurance Refund: $300

In this scenario, the $300 refund from cancelled GAP would be sent to the auto loan lender. The lender would then credit this $300 towards the remaining $18,000 loan balance.

The new adjusted loan balance after the $300 credit becomes $17,700. This $300 reduction of principal is the balance adjustment resulting from the GAP cancellation refund.

So in summary, a balance adjustment allows a refund from cancelled GAP insurance to lower the remaining auto loan balance, saving on interest over the loan term. By cancelling unnecessary GAP, the balance adjustment can provide savings.

Balance AdjustnmentAmount
Original Auto Loan Amount$20,000
GAP Insurance Premium Financed$500
Remaining Loan Balance$18,000
GAP Insurance Refund$300
Balance Adjustnment

FAQs

Can I cancel gap insurance on auto loan?

Yes, gap insurance can be cancelled at any time by contacting your lender or insurance provider. However, you typically need to act within the initial cancellation period, often 30-60 days, to receive a full refund of your premium. After that, cancellations may only yield a partial refund based on the time remaining in the policy term. Be aware that cancelling gap insurance leaves you liable for the gap between your loan balance and insurance payout if your car is totaled.

What happens if you cancel your gap insurance?

If you cancel your gap insurance policy, you will no longer have coverage that pays the difference between your auto loan payoff and your primary insurance settlement if your car is totaled. This leaves you responsible for the potential “gap” amount. Your refund when cancelling will depend on how soon into the policy term you cancel. Within the initial cancellation period, you typically receive a full refund. After that, your refund will be prorated based on the time left on the policy.

Can I change my mind about gap insurance?

Yes, you can change your mind about keeping gap insurance if you act quickly. Most gap policies have an initial cancellation period where you can cancel and receive a full refund, usually 30-60 days. To cancel, contact your lender or insurer directly. You’ll need to submit cancellation paperwork. After the initial period, you may still be able to cancel but your premium refund will be partial based on unused policy term.

When should you cancel your gap insurance?

You may want to cancel your gap insurance when you no longer need coverage for an auto loan, such as if you pay off your loan early or have built up substantial equity through payments. It can also make sense to cancel if you find cheaper gap insurance rates elsewhere or want to remove the cost of premiums. Just be aware of the impact on your loan liability if cancelling. Many experts recommend keeping gap coverage until you owe less than 20% of the car’s value.

Q: How long does it take to get my refund after cancelling GAP insurance?

A: You should receive any applicable refund generally within 30-60 days of proper cancellation. Follow up if delayed.

Q: Can the dealership charge a fee if I cancel the GAP insurance?

A: Dealerships cannot impose cancellation fees, but the GAP provider may charge a small administrative fee.

Q: Will cancelling GAP insurance hurt my credit?

A: No, canceling GAP does not impact your credit score or rating as long as no loan terms were violated.

Conclusion

In conclusion, GAP insurance added during vehicle financing can generally be cancelled if you act quickly while cancellation rights apply. Carefully reviewing your specific GAP contract is crucial to understand available refunds, procedures, and potential fees.

Contact the GAP provider in writing to cancel – not the selling dealership. Follow all instructions and persistently follow up to confirm cancellation and receive any owed refund. If financed into your loan, notify the lender to process a balance adjustment.

Consider factors like your loan length, down payment, and risk tolerance. While canceling unnecessary GAP provides savings, the coverage may still be valuable depending on your situation.

With diligence and careful research, unwanted GAP insurance can be cancelled and premiums restored to your pocket. But also objectively weigh if retention makes sense for your loan specifics and risk factors before deciding. An informed buyer makes the smartest financial move.

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