Swanson O’Dell explained the basics of GAP insurance here. GAP insurance can certainly be a useful thing, but, as with any financial product, there are dangers to check for when you purchase.

The Dealer Swallows the Premium

GAP insurance is most commonly purchased when you are buying a vehicle at a car dealership. As you are finalizing the details of your purchase contract, the finance manager of the dealership will talk to you about GAP insurance, service contracts, and maintenance contracts. A GAP contract should cost between $300 and $800, which will be rolled into your vehicle loan. The dealership takes a percentage of that money and pays the rest to the insurance company who will administer the GAP insurance.

Unscrupulous dealers realize something, though: The likelihood that you will use this GAP contract is very small. So, instead of just taking their percentage and forwarding the rest to the insurance company, dealerships will often just pocket the whole amount, taking the risk that you will never try to use the contract, and that, if you do, you will not dig into their malfeasance.

GAP Insurance with a Cap

Like any financial product or insurance contract, GAP can have a lot of fine print. As you’re sitting in the dealership, anxious to be done with paperwork and driving your new car, it can be very hard to make sure that you read all the details, but they are all important.

As Swanson O’Dell explained, the purpose of GAP insurance is to cover the difference between the valuation of your vehicle by your collision insurance and the balance that you owe on the financing. Depending on your car, the price you paid, and your interest rate, that balance can sometimes be quite large. GAP companies that are just trying to make a quick buck do not want to be responsible for large payouts, so they put a cap on their liability. Somewhere in the contract there will be a statement such as, “Coverage will not exceed 10% of the NADA blue book valuation of the insured vehicle.”

That may not sound like something terrible, but it means that this contract may well be almost completely useless to you. For example, if the insurance company values your car at $10,000 and you owe $15,000 (numbers which are very common), this GAP contract will only pay out $1,000, leaving you with a $4,000 bill that you thought they would cover.

The best way to avoid these scams is to make sure that you’re dealing with a solid, reputable dealer. Check Google and Yelp reviews before you go to a car lot. Remember that no matter how good the price may be, if you’re dealing with someone you can’t trust, it still isn’t a good deal.


Comments (6)

  • Dennis E. Eads on October 7, 2016 at 9:43 AM

    I had a RAM 3500 that I paid for GAP insurance for. I had to buy it or TD Allen didnt want to loan me the money as I was top heavy. I agreed to the GAP policy . Well on 26 March 2015 my truck lost the front drive shaft and the insurance totaled it out as it had 27000 dollars in damage. The insurance paid out 19000 and change which left me a balance of approximately 27000 dollars. When I went to claim GAP they said I had no policy. The dealership never funded the GAP and I do have a piece of paper that says I have GAP. To my knowledge that dealership has been closed and the then owner prosecuted with immunity against any other claims. Now I have debt collectors ruining my credit. What can I do. I have been told I cant sue the guy so I sit here watching people take aim at me and all I can do is dodge the bullets. Reply

    • Kevin Faulk on October 7, 2016 at 12:21 PM

      Dennis, There are still possible solutions to this situation. Even if you can't go after the dealership, the finance company may be liable for the actions of the dealer. I'm going to email you. Get back in touch with me and we can figure out how to help you in this situation. Kevin Reply

  • Melinda on February 7, 2017 at 12:58 AM

    I paid $1095 for a service agreement on a used car purchased at a dealership. I decided to cancel the plan and today I received a letter from the company denying payment of a refund because my car was too old for the plan! It said to contact the dealer for a full refund which I will do today. So not only did the dealer sell me a useless service agreement but also it took me canceling the the service plan (purchased in October) before the insurance company notified me that I was not covered. How ridiculous is that. Reply

    • Kevin Faulk on February 7, 2017 at 3:30 PM

      Melinda, Wow! That is horrible. Before you contact the dealership, I would like to talk to you about the situation. There are some very good options open to you. Reply

  • Gregory sanders on July 15, 2017 at 11:09 AM

    We purchased a vehicle in November of 2016 and purchased gap through the dealership we signed the contract and received the Documents. In May of 2017 we totalled the vehicle and our primary insurance issued the checks and we contacted gap to give them information they would need to get the process going we waited a couple of week and had no response come to find out the dealership pocketed the money we gave and didn't file the papers. I have tried repeatedly to contact the manager who wrote up the contract but he is conveniently never available so i need advice Reply

    • Kevin Faulk on July 17, 2017 at 3:38 PM

      Gregory, I would love to help you with this. I've emailed you. Please call me as soon as possible so that I can help you. Reply

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