Originally published in September 2020.
Negative equity – owing more on a trade vehicle that it’s worth – is more common today than ever before. Some reports claim that 44% of new car buyers are upside down on their trade vehicles; the average amount of negative equity is over $5,000. Some dealers have told me that between 90 and 100% of their customers come in upside down, and the amount of negative equity can exceed $10,000.
GAP is a great product to offer because it presents one of those circumstances where benefit meets undeniable need. But it has to be sold right, so let’s talk about that.
A common explanation of what GAP does is that “it covers the difference between what is owed on the vehicle and its actual cash value in the event of total loss or unrecovered theft.” That’s true as far as it goes, but it doesn’t go far enough.
GAP products come with certain limits. Those limits must be disclosed to the customer, and the earlier the better. If a customer buys GAP and his claim exceeds the product’s limits, he’ll have what is called an “unfunded deficiency.” And you’ll have what’s called a “lawsuit,” if you didn’t explain those limits so the customer could make an informed decision. I’ve seen two class actions on those facts, and the dealer lost both times – big.
Here are some ways to make sure your GAP’s limits are properly, and consistently, disclosed. First, check out the product description on your F&I menu. This is usually the first point in a sales transaction that GAP has been mentioned. If there is a limitation on the GAP coverage, this is the place to flag it, so add “Some limitations may apply.” This puts the buyer on notice, and highlights the issue. If litigation ever arises concerning GAP, it would be helpful to be able to prove the possibility of a limit was raised at the first opportunity.
Second, see if the GAP’s limits are printed conspicuously on the front of the registration form. That’s best. If not, see if they are conspicuously printed on the back. A truly confusing form is one that suggests on page one that the entire deficiency will be covered, and has a limitation in the fine print on page two. What the front page gives, the back page should not take away. One way to avoid confusion with such a form is to draw the customer’s attention to the limitation on the back of the form and ask him to place his initials near it.
Third, explain to a customer affected by the limitation how that limitation will affect him. If a customer is financed beyond the limitations of a GAP product, disclose the limitation. Explain that the product is intended to cover the gap related to this transaction, not the remainder of his last one (if it’s negative equity that put the financing over the limit).
The problems of GAP limitations and over-financing can foster the temptation to “beef up” the value of a car by including fictitious options. Suddenly, two-seat convertibles are booked out as having roof racks and brush guards. This practice, called “power booking,” could mask the over-financing in the short term.
But insurance adjusters really do check out totaled vehicles and inventory the options they actually contain. This would reveal the over-financing and the power booking, which could add bank fraud, wire fraud, deceptive trade practices and RICO to a dealer’s worries. Never include in any transaction document options that were not actually included in the deal.
Flag possible GAP limits on your F&I menu;
Clarify any confusing or contradictory GAP limitations for the customer;
Explain GAP limits in detail to those customers affected by them; and
Read your GAP forms – know what you’re selling!