By Troia Lyles
While working in the lucrative car business for over 4 years, I’ve come to learn that there are so many consumers that come into the dealership with an idea of their intelligence being higher than most people that work at said dealer. However, the look of confusion when they would sit in front of me (whether as a sales person, finance & insurance manager, or sales manager) was very frequent, and honestly, gratifying.
I loved the conversations that would come up about what they read on some website somewhere that will tell them that, in the car business, we are all liars, and that we just want to take advantage of every person that walks in the door. Well, it is not true. I’m sorry to have to pop your balloon of expectations, but every person that works there has several things in common with you. Some are listed here:
1) They are human.
2) They are working to provide for their family.
3) They are paid for their time that they spend with customers (fairly, and sometimes unfairly).
4) They are expected to understand the business they are in (they must research the brand, competitors, demand for the product, etc.)
5) They are human.
Yes, I repeated one of the points because that is very important to understand. There is a moral aspect in the business of sales (with most people in this business) and because of that, it is not as cut and dry as most “consumer reports” make it out to be. This leads into the point of this article, as well as the subsequent articles in this series that will have different subjects to give you a different prospective and ACTUAL education on what happens when it is time to purchase a vehicle.
So the first lesson is: What is GAP Insurance, and why do I need it!? GAP insurance is an acronym for Guaranteed Auto Protection (and in some companies its Asset Protection). The point of GAP insurance in a nutshell is to protect your money.
When you purchase a vehicle (and in this example I will refer to a new car), the car is expected to have a drastic depreciation as soon as you take possession of the vehicle. In dealership lingo, that means “to drive off the lot”. This depreciation is unavoidable. So this is when “putting money down” becomes important. It is understandable that not everyone has the cash flow to put down a significant amount of money for the purchase of a car. So let’s assume that you will not put ANY money down. In other words you want to finance 100% of the purchase.
This purchase will not only include the negotiated sale price of the vehicle, but it will include the taxes (according to the state you want to register the vehicle), license fees, and dealership processing fees. Dealer processing fees are indeed legal, but still can be negotiated, which I’ll cover this in the series in more detail. Now, take that entire total and assume you will have interest. The interest rate (or APR) of course is determined by your credit.
So you’ve purchased your car! Congrats! Inhale the new car smell, turn up the radio, and pat yourself on your back. You’ve made a large purchase, and in turn, increased your credit portfolio with more purchase power! Then you get into an accident, and you total the vehicle. Your insurance company does their job, and gives you a check for the value of your vehicle. You will look at the check, and look at the principal of your loan and see a huge difference. The value of the vehicle drops usually about 20% (with most American manufactures), and then of course all the other fees that were incorporated at the time of purchase is a part of your principal balance. For most buyers, this delta can range from anywhere from $500-$7000. That is a lot of money. You didn’t have the cash to put down at the time of purchase, so where would you come up with the difference?
One of the biggest misconceptions is how soon can you pay off your loan after a total loss. Most banks require it to be paid off within 30 days. This is where GAP insurance becomes important. It simply pays the difference between the value of your vehicle at the time of total loss and the principal of your loan. Some insurances even pay up to $1000 of your car insurance deductible. (Ask the finance manager that is assisting you with your purchase if this would apply to you).
How much does GAP insurance cost? It usually ranges anywhere from $4-25 per month (depending on the APR). That is incredibly affordable considering the coverage it provides during the time of your loan. When would I NOT need GAP insurance? Usually if you are able to put down 15% or more at the time of purchase, you eliminate the need for the insurance. The reason for that is because the cash down provides “equity” towards your loan. It is bringing down the value of your loan, while the value of your car stays.
How long is the insurance active? If you do decide to include GAP insurance, it remains on your loan until it is paid off. For example, if you open a loan for 72 months, and you pay it off in 72 months, the GAP insurance has been included until the final payment was made. If you open a loan for 72 months, but pay it off early (48 months), the GAP insurance you purchased was for 72 months. Therefore you are due a refund of the 2 years you did not use it.
There are many little things to GAP insurance that can be explained by the finance manager you work with at the time of purchase. However, I am open to answering any additional questions you may have in regards to this program through comments below.
Take care, and as always, be smart.
Ms. Lyles is a graduate of Howard University with studies in Music and Business. Her career has seen her spend time as a financial services manager with one of the DMV’s largest regional auto dealerships where she developed expertise in consumer finances, credit, banking, and loan to value analysis. Currently, she is COO of a regional technology company and Founder/CEO of her own financial consulting firm.