In previous articles, I’ve discussed the wide variety of products available for purchase in the Finance & Insurance (F&I) office when you buy your new or pre-owned vehicle. Please remember, that every product or service is optional. It is against Federal Guidelines for a lender to require the purchase of say a Vehicle Service Contract (or commonly known as an extended warranty) to extend you a line of credit. And they don’t!! It’s the unscrupulous manager that will tell you this. Simply say no! However, you should carefully consider all their products and choose the one(s) that meet your needs.
But, there is one optional product you should virtually never decline if you are financing your vehicle. About the only time you may not need this coverage, is if you’re financing less that 45% of the fair market value of the vehicle.
This product is G.A.P. This is an acronym that stands for Guaranteed Asset Protection. It is more commonly referred to lately as Debt Cancellation. Why? Because it does exactly that, eliminate your debt owed to your lender if your vehicle is deemed a total loss by your insurance company. Keep in mind that the reason for the total loss doesn’t make a difference. Just as long as your insurance company deems the repair cost will exceed the fair market value of the vehicle, it will be deemed a total loss.
But what if what your insurance company pays out less than the amount you owe? Well, there are three (3) ways for you to repay the debt.
- 1) Continue to make your monthly payments until the balance is paid in full. (Most people need that money for their next payment)
- 2) Write a check for the difference. (Most people don’t have the thousands of dollars available to pay the balance all at once)
- 3) Make a claim on the G.A.P. policy you purchased when you bought your car and have them pay the entire difference between what your insurance company paid for the claim up to and including your auto insurance deductible (Depending on your states regulations, this may be limited to $500 or $1,000)
Which one makes more sense? Number 3 right? And it’s extremely affordable and depending on the interest rate you qualify for, only increase your monthly payment by $12-19 per month.
But why should you purchase this valuable coverage from the dealership and not your auto insurer?
First, G.A.P and Debt Cancellation purchased from the dealership will pay your auto insurance deductible. Most auto insurance policies will still require you to pay your deductible.
Second, if you switch auto insurance carriers during the term of your loan, you won’t have to re-purchase the G.A.P coverage. The coverage you purchase at the dealership automatically follows you. No extra work for you. And God forbid, you forget to purchase G.A.P. coverage or your carrier doesn’t offer G.A.P. coverage and you experience a total loss. (That would be really bad!)
Third, you will not have a premium increase. Coverage purchased at the dealership is a one- time fee that has been calculated into your monthly payment. You are protected from premium increases.
Fourth, there are no limitations as to coverage amounts. This will protect you from any negative equity you may be rolling into your new loan from your previous vehicle. In fact, this is the number one reason to purchase G.A.P. Regardless of the amount owed, your G.A.P. coverage purchased from the dealership will cover 100% of the difference between your insurance settlement and the amount owed to your lender, again including your auto insurance deductible. Your insurance carrier may have policy payout limitations.
Sixth, if you return to the dealership you purchased the original vehicle from, they will assist you in the claim process and the purchase of another vehicle that very day as they will explain to the lenders you have G.A.P. coverage and the lender will discount that loan against your payment and debt to income ratios. In fact, any dealership will be able to help you get your replacement vehicle even before the process is complete.
Here an example:
Let’s say you still owe $27,000 on your initial $30,000 loan. You vehicle is deemed a total loss by your insurance company (for any reason, fire, theft, collision, flood, hail storm, etc). It’s just going to cost more to fix the car than what it’s worth. Your insurance carrier calculates the fair market value of your vehicle as $22,500. But guess what, you still owe your lender that $27,000, and they don’t care! They want the $27,000 (and you contractually owe it and can ruin your credit if you don’t satisfy that obligation). You will get $22,000 from your insurance company (did you forget you had a $500 deductible??) and your G.A.P. coverage will pay the $5,000 difference. I don’t know about you, but for $15 a month extra in monthly payments, if I don’t have to come up with $5,000 out of my pocket to protect my credit, is worth every penny.
For all these reasons above, most insurance agents buy from the dealership and not their own companies.
Happy car shopping!