

Sunday, May 8, 2016

Car Buying | The secrets of Guaranteed Asset Protection (GAP) Insurance

Spanish Coches Vintage Dealership

Introduction to Guaranteed Asset Protection (GAP) Insurance Coverage

When you go to a Car Dealership to buy a car, the sales person will eventually hand you off to a Finance Manager, who will want to sell you additional products. The products are known as "Aftermarket Products" or "Back End Products".

One of the two most common is GAP, the other is Service Warranty which we will cover later.

The idea behind GAP is actually fairly sound. It solves a problem many have encountered.

  • Let's say that you buy a car, then you get in a wreck (the other guy's fault), and the vehicle is deemed a total loss "totaled". The insurance company pays out the "Fair Market Value (FMV)" for your vehicle.
  • Let's now say that the FMV for your car is $16,000.00; however, you still owe $20,000.00. 
  • That means that the insurance does NOT pay off your loan. You are still left with a balance of $4,000.00 to continue to pay on, even though you don't have the car anymore. 

Many people do not realize that the money you borrowed is owed whether you have the car or not. Even if you bought a car and the engine blew up the next day, you owe the money for the entire loan in most cases.

You paid cash for the car?  GAP is meaningless to you, because GAP only pays the deficiency balance of a loan.

Financing the car? Hopefully you paid 20-30% down on the car and only financed the rest, in which case your FMV should remain over the loan balance forever.

But, if you are like most of the USA, you financed a car for the full, or nearly full, value. This means that the car is worth less than the loan balance 30 seconds after you signed the paperwork. This is because part of the value of any car is the "number of previous owners". So when you became owner 2 (or 3, 4, 10, etc) you reduced the value considerably. Are you the first owner? Great, it just became used and you reduced the value too.

If you are "upside down", owe more than it's worth, you probably need GAP, or a GAP like product.

GAP Insurance

GAP then comes in to pay the difference between what you owe ($20,000) and what the regular insurance paid ($16,000), which means gap pays that remaining $4,000 for you. If you paid $800 for the GAP, and they ended paying $4,000 for you, you win.

And that's the name of the game in insurance. Someone might pay car insurance for their entire life and never use it. Another might pay for a few months, and total the car. Insurance companies bet on that.

There is no monthly bill for this coverage, because you paid a one time fee for it. Typically the products is added to the total amount you are financing, so you don't notice it much if you are only thinking about the "monthly payment".

GAP is NOT required for financing

**** This is important ****
Under no circumstances should any finance manager at a dealership tell you that GAP is required for financing. This is part of Anti-Tying regulations in the banking industry, and it is illegal.

Most GAP contracts actually tell you in bold letters above the signature that it's not required for this reason.

If any finance manager tells you that the bank is requiring GAP to get the loan approved... RUN. That dealer is lying about something that could get them in big trouble. If they lie about that, they probably lied about everything else.

GAP Exclusions

Most GAP contracts have exclusions. They will not pay for late payments, late interest, late fees, repossession fees, etc. If you paid late in any way, it could either void the GAP or reduce your coverage.

GAP Costs

The average GAP contract is going to cost between $300-$900 at a dealership. The secret they won't tell you is that they dealership only paid $60-$100 for it from the GAP company. The rest is 100% profit for the dealership.

You can usually negotiate the cost of the GAP with the dealers in exchange for other issues on the car.

GAP Alternatives

Many, if not most, insurance providers offer GAP as a "rider" to an existing policy. But most of them don't call it GAP, because GAP get's a bad rap in the auto industry.

Your insurance company might call it something else:

  • Total Vehicle Replacement
  • Loan Payoff Coverage
  • Etc

The name will be different, but the description of the coverage will match the example I gave above.

My insurance company denies offering "GAP", but my insurance company offers Total Vehicle Replacement Coverage as a rider to my full coverage insurance for less than $2/month.

That's WAY cheaper than buying it from the dealer.

But if you are one of those who tends to let insurance lapse, you may want to buy it from the dealer instead.

I hope that helped!

The Insider

The Insider is a BIG fan of Dave Ramsey:

  • Listen to The Dave Ramsey Show (HERE)

Popular Posts