GAP protects not only the consumer's interest, but the lender's. This is probably the best argument as to why the customer should purchase GAP protection for their retail loan.

Every now and then something comes along that has the formula for a successful finance and insurance product. That is, it profits the auto dealer and tremendously benefits the customer. The most recent one is guaranteed auto protection, or GAP.

In 1996, Regulation Z (a Truth in Lending Act) was updated to specify how GAP would be disclosed on a finance contract, which paved the way for lender's approval of the product.

The Federal Reserve Board amended Regulation Z to make it clear that GAP protection, if presented optionally and allowing for early cancellation refunds, can be included on a finance agreement without increasing the finance charge and, thus, the annual percentage rate.

The Fed specified two types of GAP products: a debt cancellation product and an insurance product, and allowed states to decide how each is regulated.

Up to this point, banks were unclear how to handle the product and steered away from it. In most states, banks have given dealers approval to include the product although sometimes restricting the sale price in the case of a debt cancellation type of GAP products. They have even embraced the product to the point of offering their own version of it.

So, what exactly, is GAP? GAP is a type of protection that covers a finance or lease contract against the difference between the amount of money owed on a vehicle at the time of a total loss and the fair market value of the vehicle that the customer's insurance company pays.

This protection also applies to a stolen vehicle that is not recovered.

Most GAP polices additionally cover all or a portion of the customer's deductible.

It first became popular on leased cars. Most lenders included it as a “free” benefit to the lease agreement, although one could argue the customer might be partially paying for it in the acquisition fee.

Why do lenders require this coverage on the agreement? Two reasons.

First, since the customer typically is financing the entire sale price or more, they are likely to face negative equity in the event of a total loss of the vehicle.

Second, the owner of the lease vehicle is the lender.

If the lending institution sees the value enough to require it, doesn't it make sense — if customers are financing full or close to the full sales price of the vehicles — that they should protect themselves in the event of a shortfall? After all, many customer's equity position on their vehicle is no better than if they would have leased it.

A Typical GAP Illustration
Amount originally financed $25,000
Term 60 months
Date of Loss 30 months later
Loan Payoff — estimate $16,000
Insurance Settlement or estimated actual cash value $13,000
GAP $3,000
Insurance Deductible $500
GAP protection pays $3,500

Selling GAP

Selling GAP protection begins with qualifying the customer's needs. The need for GAP is determined by:

  • The percentage of the sale price the customer is financing,

  • How long are they financing the vehicle for,

  • How many miles a year does the customer drive.

The more accelerated the vehicle will depreciate, the more likely there will be a GAP of protection.

I'm often asked, “When should I offer this product?”

Some argue that there is always a need, since it will cover the customer's deductible.

I would prefer to take a more conservative approach. I think one can adequately expect a deficiency if the customer is financing 90% or more of the sale price, so that's the point when I sell the product. If they are financing less than 90% of the sale price, I elect to spend more time on another product that the customer has a more reasonable opportunity to benefit from.

Once a need for the product has been established, it's time to present the product. I like a direct approach that describes to the customer how the product works and then shows them the cost. It goes like this:

“Mr. and Mrs. Doyle, you, like many of our customers, are financing 95% of the sale price of the vehicle. This makes total loss protection an excellent value for you.

“This product is designed to pick up the difference between what your balance is and what the insurance settlement is, in the event your vehicle is totaled or stolen and not recovered. In addition, it will pay your deductible. The protection will only increase your monthly payment by about $7.”

Most customers see the benefit as it's presented. But expect objections, and be prepared to handle them as they arise. A customer objection usually shows interest in the product, and is simply a request for additional information and should be handled as such. The most likely objections are:

  1. I don't need it.
  2. That costs too much.
  3. My insurance pays 100%.

Let's address each one.

I don't need it

F&I Manager: “I hope not, but one thing is for sure. Since you're like a lot of customers who finance 95% of the sale price, in the event your vehicle is totaled or stolen and unrecovered, you are likely to have a gap in coverage.

“Mr. and Mrs. Doyle, have you ever leased a vehicle before? (Wait for a response.) In the event you did lease a vehicle, GAP coverage most likely was included in the lease agreement by the lease company. Most lease companies require it since they are the owner of the vehicle and understand how vehicles depreciate. Since you will be the owner of this vehicle, can you see how $7 per month is a small price to pay for such good protection?”

That costs too much

F&I Manager: “Mr. and Mrs. Doyle, in the event you have a total loss or stolen vehicle, you are likely to have a gap in your coverage, including your deductible. (Show them a typical illustration. Don't make the mistake of comparing their vehicle) If that were to occur, you will have either to make up that deficiency or finance it into your next purchase — if the bank will allow you to. This protection comes out to about $7 per month. Do you think it would be easier to afford that or the $3,500 deficiency?”

My insurance pays 100%

F&I Manager: “Most customers are unaware that the insurance company will normally settle for actual cash value, forcing the customer to make up the difference, plus pay their deductible. The insurance company would have to sell you a GAP policy of its own, which would cost you extra to protect the difference. They would not be able to include that amount right in your monthly payment like we can.”


Ron Martin is the author of the book, “The Vision of Finance and Insurance.” He's a national sales trainer and consultant for automotive dealers. To learn more about his company, The Vision of F&I, Inc., or to place an order his book, visit the Web site www.thevisionoffandi.com or call 219-637-2796.