As car dealers, you’re always on the hunt for ways to improve your offerings and protect your customers – all while boosting our bottom line. And while there are plenty of methods and techniques by which to do so, one of the most effective is by offering Guaranteed Asset Protection (GAP) insurance.

A way to offer customers protection and financial security, GAP insurance is an important product for any dealership. It works to cover the gap between what a customer owes on their car loan or lease and the actual cash value of their vehicle in the event that it is totaled or stolen.

While GAP insurance isn’t always necessary, it does offer unique protections and is a great way to boost your earning potential. Here’s how it works.

What is GAP Insurance Coverage?

GAP is an optional insurance policy that covers the "gap" between what a customer owes on their auto loan and what their car is actually worth if it's totaled or stolen.¹ 

As a dealer, you’re all too familiar with how quickly vehicles depreciate - often 20% or more as soon as they drive off the lot. This rapid depreciation can leave our customers in a precarious financial position. By offering GAP insurance, we can provide them with peace of mind and financial security in the event of a total loss.

How Does GAP Insurance Work?

Let's walk through a scenario to see how GAP insurance works.

A customer purchases a new SUV for $35,000, putting $2,000 down and financing the remaining $33,000. Unfortunately, six months later, the vehicle is totaled in an accident. 

The customer's auto insurance company determines that the actual cash value of the vehicle at the time of loss is only $28,000. This leaves a $5,000 gap between what the customer owes and what their insurance will pay.

Without GAP insurance, your customer would be responsible for paying that $5,000 out of pocket, on top of having to shop for a new vehicle. With GAP insurance, this difference is covered, protecting your customer from additional financial stress during an already difficult time.²

It's key to emphasize to our sales teams that GAP insurance isn't just for new cars - it's also available and valuable for used cars, which often make up a significant portion of many dealerships' sales.

Who Is An Ideal Candidate for GAP Insurance?

How do you know which customers are the best fit for GAP insurance? You don’t want to waste time pushing a product that may not be necessary for every customer. Here are some factors to consider when identifying an ideal candidate for GAP insurance.

1. Are Leasing a Vehicle

Customers who are leasing a vehicle may be more likely to benefit from GAP insurance.³ Since they do not own the vehicle, they may not have as much equity built up in it and could face a higher loan balance than the vehicle's actual value if it gets totaled.

2. Have Low Down Payments

Customers who make a low down payment on their vehicle purchases may also be good candidates for GAP insurance. Their initial investment is lower, meaning it could take longer for them to build equity in the vehicle and potentially leave them with a larger loan balance.

3. Long-Term Finance

If your customer chooses to finance their vehicle over a longer term, such as 60 or 72 months, they may also benefit from having GAP insurance.

4. Roll Into Negative Equity From a Previous Loan

If your customer is rolling over negative equity from a previous vehicle loan into their new purchase, they may want to consider getting GAP insurance. This is because the negative equity can increase their loan amount, leaving them with a larger balance if the vehicle is totaled.

5. High Interest Rates

Customers with high interest rates on vehicle loans could also benefit from GAP insurance. This is because a large portion of their monthly payments will go towards interest rather than paying down the principal balance, making it harder for them to build equity in the vehicle.

A general rule of thumb: recommend GAP coverage if the customer is putting less than $5,000 down on a car or even more for higher-priced vehicles.⁴

What Factors Affect GAP Insurance Policy Cost?

GAP insurance policies can vary in cost depending on a few key factors. These include the type of vehicle, loan amount, and length of the loan.

• Location
• Vehicle age
• Auto insurance claims history
• Length of the loan term
• Amount of the down payment

As dealers, you may charge between $500-$700 as a flat rate for GAP coverage.⁵ This is often more cost-effective for customers compared to adding it to their auto insurance policy, which can cost $20-$40 per year over the life of their loan.

The Business Case for Selling GAP Insurance Coverage

• High Profit Potential: GAP insurance offers significant profit margins, with dealerships often keeping up to 50% in commissions.⁶ This can substantially boost your F&I department's performance.
• Enhanced Customer Satisfaction: By offering GAP insurance, you protect your customers from potential financial loss. This builds goodwill, enhances customer loyalty, and can lead to repeat business and referrals.
• Upsell Opportunity: Discussing GAP insurance opens the door to conversations about other F&I products, potentially increasing overall sales per customer.⁶
• Competitive Advantage: Not all dealerships offer GAP insurance, so this can set your dealership apart in the market.
• Reduced Liability: Offering GAP insurance reduces the risk of customers blaming the dealership if they end up with a large loan balance after a total loss.
• Increased Customer Lifetime Value: Customers who feel protected are more likely to return for future purchases and services.⁷

Implementing GAP Insurance in Your Dealership

You don’t want to just sell your customers a car – you want to sell them peace of mind and protection. Here's how to effectively implement this valuable product in your dealership:

• Choose the Right Provider: Partner with a reputable GAP insurance provider that offers competitive rates and excellent customer service.
• Integrate with Your F&I Process: Work to naturally incorporate GAP insurance into your existing F&I presentation.⁷
• Train Your Team: Conduct thorough training sessions to ensure your F&I staff understands the product inside and out.
• Create Marketing Materials: Develop brochures, digital content, and other materials to educate customers about GAP insurance.
• Monitor Performance: Regularly review your GAP insurance sales performance and adjust your strategy as needed.

Don’t Be Afraid to Offer GAP Insurance

Over time, this coverage will likely become even more popular and necessary for dealerships to offer. As a dealership, you’ll want to stay up-to-date on auto industry trends and consumer preferences to ensure the success of your F&I presentation.

Remember, the key is balancing profit with customer service to create a win-win situation. By offering GAP insurance, you're not just boosting your F&I profits, you're also providing a valuable service that can save your customers from significant financial stress down the road.

For dealerships, it’s important to commit to understanding and effectively communicating the benefits of GAP insurance to customers. It's good for your bottom line, and more importantly, it's good for your customers.

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Sources:

1. Hearst Autos Research. “How Much Is GAP Insurance: Everything You Need to Know.” Car and Driver, 25 May 2021, www.caranddriver.com/car-insurance/a36534152/how-much-is-gap-insurance/. Accessed 5 Aug. 2024.
2. Consumer Financial Protection Bureau. “What is Guaranteed Asset Protection (GAP) Insurance?” Consumer Financial Protection Bureau, 8 Mar. 2024, www.consumerfinance.gov/ask-cfpb/what-is-guaranteed-asset-protection-gap-insurance-en-797/. Accessed 5 Aug. 2024.
3. McParland, Tom. “Why Is The Dealer Pushing GAP Insurance Even When I’m Making A Big Downpayment?” Jalopnik, 29 Dec. 2020, jalopnik.com/why-is-the-dealer-pushing-gap-insurance-even-when-im-ma-1845962123. Accessed 5 Aug. 2024.
4. Shefska, Zach. “What Is GAP Insurance, and Do I Need It?” CarEdge, 31 July 2024, caredge.com/guides/what-is-gap-insurance-and-coverage. Accessed 5 Aug. 2024.
5. Weida, Kaz. “What is Gap Insurance?” Yahoo Personal Finance, Yahoo Finance, 13 Mar. 2024, https://finance.yahoo.com/personal-finance/gap-insurance-183936971.html. Accessed 8 Aug. 2024.
6. Rosenow, Robert. “Leveraging F&I to Maximize Car Dealership Profit Margin.” JM&A Group, 17 Aug. 2023, last updated 10 Jul. 2024, https://www.jmagroup.com/blog/leveraging-fi-maximize-dealership-profit-margin. Accessed 8 Aug. 2024.
7. The ACE Group. “Demystifying How Gap Insurance Works Through Dealership.” The ACE Group, 2024, www.theacegrp.com/how-does-gap-insurance-work-through-dealership/. Accessed 5 Aug. 2024.