Some Car Dealership Incentives Carry Higher Risks

Guaranteed Asset Protection (GAP) insurance can offer value for car buyers, especially those who opt for a low-interest rate alternative to a cash rebate.

Ability to explain this reasoning can help F&I managers to sell GAP to more customers, says Krouse Consulting’s Bill Krouse, a former dealership general manager.

The GAP presentation should clarify to buyers that choosing a low-interest rate option creates risks should an accident or theft result in an insurer declaring their vehicle “totalled.” 

GAP protection mitigates those risks by covering the difference between what an insurance company pays to the finance or lease company based on fair market value and what the consumer owes on the vehicle.

By understanding how to navigate the rebate versus rate decision with customers, an F&I manager can meaningfully educate consumers. Cash-back offers applied as down payment lower the total amount financed by that much. That means the buyer instantly has that cash-back amount as equity in the vehicle.

Not so with rate buyers. They likely have sufficient equity in their trade-in vehicle or can write a check for a downpayment. Or they simply want the lower monthly payment that a low-rate offer promises. 

But low rate often puts car buyers at an equity disadvantage.

“For a (low-rate) buyer who passes on a $5,000 rebate or another offer, and six months later gets t-boned, insurers will pay the market value for that vehicle, not what the remaining loan amount is,” Krouse notes.

“It leaves the owner to make up the difference to get the title cleared to salvage the car,” he says. “That can be several thousand dollars. Most buyers don’t have that cash quickly available.”

GAP protection also can be a wise choice for buyers financing for longer than 48 months. Experian reports in its State of the Automotive Finance Market report that consumers are continuing to extend loan terms as a way to keep payments low.

Purchasing GAP is often prudent because “cars tend to depreciate much faster than you pay off your loan, which means you will likely be underwater on your loan for a few years after you buy your vehicle,” the Experian report says.

GAP coverage also makes sense for people putting out small downpayments.

Buyers often don’t understand the ramifications of low rate vs. rebate. A quick discussion in order to determine their risk or equity tolerance can guide F&I managers to suggest which option is best for them. Share your rationale from a sound understanding of the issues, Krouse says.