Can a Lender Require Gap or Credit Insurance?
If someone at a finance desk has told you that gap insurance, an extended warranty or credit insurance is required to get your auto loan approved, the Consumer Financial Protection Bureau's answer is short: generally you cannot be required to buy any of them, and in most situations they are optional. That is worth knowing before you sign, and it is still worth knowing afterwards, because an optional product you already agreed to can usually be cancelled.
First, a Distinction Worth Getting Straight
Two very different things get called insurance in a finance office, and they carry different rules. Keeping them apart is what makes the rest of this page usable.
- Physical damage coverage on the vehicle, usually described as comprehensive and collision, is typically required by an auto loan contract for as long as you owe money. That requirement comes from your loan contract rather than from the CFPB page cited here, and it exists because the car is the lender's collateral.
- Add-on products sold alongside the loan are a different category. The CFPB states it plainly: extended warranties, GAP insurance, and credit insurance are optional when you take out an auto loan.
So a lender insisting you carry comprehensive and collision is doing something ordinary. A lender insisting you buy gap insurance from them in order to be approved is doing something else, and the CFPB's guidance addresses it directly.
What Each of Those Add-Ons Actually Is
The CFPB describes the three products plainly, and the descriptions are worth having straight before you decide whether any of them is worth its price to you.
- An extended warranty or service contract pays the costs of some repairs, above what the manufacturer's warranty covers or after the manufacturer's warranty ends.
- Gap insurance covers the difference between the amount you owe on your auto loan and what your insurance pays if your vehicle is stolen, damaged or totaled. In practice that means a total loss: a repairable car is not a gap claim.
- Credit insurance is coverage that makes your auto loan payments if you are not able to.
Whether any of these is worth its price to you is your own call to make. What the CFPB's page settles is a different question: whether you were given a genuine choice about buying it.
How to Check What Your Contract Actually Says
There is a specific test the CFPB gives, and it runs in one direction: if the contract does not explicitly say the product is required, you cannot be required to buy it.
If your lender or dealer says you are required to purchase a product like gap insurance or an extended warranty, ask them to show you where your sales contract says it is required. If the contract does not explicitly state that it is required, you cannot be required to purchase it.
Before you sign anything, the CFPB's advice is to ask the lender whether the loan includes charges for optional products. That is a direct question with a direct answer, and asking it in front of the paperwork is considerably easier than unpicking it later.
You also have a simpler option than winning the argument. If a dealer or lender is pressuring you to buy optional products or services for your loan, you have the right to walk away and look for a different dealer or lender.
If You Already Signed
If the paperwork is already done, this is the part that matters most. If an add-on product is optional and you decided to add it to your loan, you have the right to cancel it during the term of the loan, which can save you money.
That right belongs to you regardless of who sold you the product. It also means refinancing is not the way to get out of an add-on you no longer want: cancelling the product directly is a separate action from replacing the loan, and it is the one to try first. If you do refinance later, ask separately about a refund of the unused portion of any add-on tied to the loan being paid off. Whether a refund is due at all, and how it is calculated, depends on the product contract and often on state law, so ask for that in writing when you cancel.
Cancelling an add-on is not the same as cancelling the insurance your loan actually requires. Dropping comprehensive and collision is generally a breach of your loan agreement, and most auto loan contracts then let your lender buy coverage on the vehicle and charge you for it, commonly far more than a policy you would arrange yourself. Cancel the optional product; keep the required coverage.
If You Were Turned Down for Refusing
The CFPB is explicit about the remedy here. If you are turned down for a loan because you refuse to buy optional products, you can submit a complaint with the CFPB. You can also file a complaint with the Federal Trade Commission and with your state attorney general or state consumer protection office.
There is one more route the CFPB names for one group of readers. If you are in the military, it says you should report this to your installation Judge Advocate General immediately, and points to a locator for the JAG Legal Assistance Office.
RefiSolutions is a free matching service and does not sell gap insurance, extended warranties or credit insurance, so we have nothing to gain from what you decide about any of them. We also cannot cancel a product on your behalf — that request goes to whoever sold it to you or services your loan. If you reach the point where the loan itself, rather than an add-on, is what you want to change, we can connect you with licensed professionals.