Published March 7th, 2023

Buying a car often feels likeIn recent years, insurance companies have started competing aggressively with car dealerships to sell guaranteed asset protection, or GAP, policies, which cover the difference between a vehicle's loan balance and its cash value if the vehicle is stolen or totaled.

When a customer tells me that they have a GAP policy through their own insurance company, I respond that there are several reasons that they may want to reconsider and purchase GAP through the dealer. Many customers will argue that is up to several hundred dollars cheaper with their own insurance company, assuming they even offer it, which many do not. My response is that, in a sense, “you get what you pay for”.

Here is why:

1) TOTAL OR FIX IT: If GAP coverage is purchased directly from the insurer and the vehicle is totaled, the insurance company is more likely to fix the vehicle than to total it. Think about it. An insurance company has an inherent conflict in determining whether to Total or Fix it.

For example: The vehicle is worth $31,000 and the customer owes $35,000 on it. An accident does $25,000 worth of damage. The insurance company can pay $25,000 to fix the car. But if the customer has GAP through the insurer and the insurer totals the car, it has to pay $35,000. Of course they fix the car and save $10,000.

My question to you is do you really want a car back that incurred $25,000 in damage. Do you think it will ever be the same as before the accident? When I first became a finance manager, I was fortunate to be trained by one of the best finance directors in the business. After I had let a customer sell me on the insurer‘s GAP coverage, he took out a piece of paper and crumpled it up. He placed on my desk and proceeded to straighten it out with his pen. He called it his rainbow close (named after the colorful title paper he chose to crumple) and didn’t say another word. WOW, the light bulb went off when I realized what a powerful statement that was and to this day, I never forgot it. By straightening the paper, he fixed it...but it would never be the same again. The same goes anytime a car with substantial damage is fixed. Just like the paper, it will never be perfect.

2) DEALER POLICIES HAVE HIGHER LIMITS: Often, a dealership will roll the amount the customer still owes on a trade-in into the loan on a new vehicle. If the new vehicle is totaled or stolen, the dealership's GAP policy pays the difference between cash value of the vehicle and the balance of the loan, including the negative equity on the trade-in. But insurance company GAP limits are generally capped out at 120% of the LTV, while many dealer policies are capped at 150% of LTV.

For Example: A consumer purchases a car that has an initial value of $30,000, but with the taxes, fees, etc and the negative equity from the trade, the loan balance is $42,000. Let’s assume  the car is totaled in the 3rd month and loan balance is $41,500 and the car is now worth $26,000. The insurer will pay off the $26,000 the car is worth and if they have the GAP Coverage through the insurer, they will pay the difference between the $26,000 and 120% of the initial value or basically $36000. The insurer will pay an additional $10,000 and the consumer will pay the difference of $5500. If GAP is purchased through the dealer, the insurance will pay the $26,000 and GAP will pay up to 150% of the initial value or up to $45,000, more than enough to payoff the car.

Most consumers, unless they have put down a large down payment, do not realize they have not purchased enough coverage when they purchase GAP coverage through their own insurers. Many seasoned insurance agents will not purchase GAP from their own companies for this very reason. However, they will not tell you because it’s how they make a living.

3) NO DEDUCTIBLE: Under the auto insurer's GAP policy, consumers must pay a deductible, anywhere from $250 to $1000, when they file a claim. The dealership's GAP policy has no deductible.

4) If consumers buy GAP from the dealership, they can switch auto insurers without losing GAP coverage. But if consumers want to maintain their insurer's GAP coverage, they must stick with that insurer over the term of the vehicle loan.

So, as I said, consumers who purchase GAP through their own insurer need to be aware so the do not... “get what you pay for”.

If you have any questions, please feel free to call Jeffrey Herman at 561-929-4960.

Jeffrey Herman is a former Finance Manager for one of the largest dealerships in the country and has over 35 years experience in the finance and legal industries.