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GAP Insurance: Two Common Scams

Kevin Faulk Aug. 5, 2016

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.