Gap insurance is typically offered by dealers to buyers of new vehicles and is designed to cover the difference between the cost of a vehicle and the value that would be ascribed to the vehicle by an insurer once driven off the lot. For example, a buyer might finance a new car for $20,000. If the buyer drives the car home and gets into an accident that totals the car, the insurer’s assessed replacement value might only be $15,000 since there is no replacement value for costs like taxes and other new car fees. Gap insurance would, ideally cover the $5,000 difference.
Gap insurance is not all the same, however, and a buyer should always ask questions and do the math themselves to make sure the cost of the insurance is worth its potential value. Since gap insurance is rarely used, it is fair to look at the purchase as buying peace of mind, but a buyer should be careful not to just throw away their hard-earned money on a gap policy that will not actually benefit them in the event it must be used. Using the example above, if the buyer pays $800 for a gap policy that covers up to 10% of the insurer’s ascribed value, it likely is not in the buyer’s economic interest to pay $800 plus interest just to prepare for the unlikely event the buyer will save $1,500.
Gap insurance is offered by most dealers but cannot be forced on a buyer. A customer is entitled to deny gap insurance, but dealers have some leeway in how they present that option to a buyer. It is not unlawful, for example, for a dealer to automatically add a gap insurance line item to the sales contract before ever discussing it with the buyer. When the buyer sits down with the salesman to review, initial, and sign the contract, the salesman will explain the purpose and cost of gap insurance, usually somewhere in the middle of explaining a bunch of other non-negotiable costs and fees. Dealers bank on buyers being somewhat tired and frustrated by this point in the auto buying process and might even pull stunts, such as insisting the contract will have to be re-done if the buyer declines to purchase gap insurance, which can nudge a hesitant buyer into getting the gap insurance just to avoid adding time to the buying process. Unless the buyer specifically denies the line item, it will end up in the auto loan irrespective of whether the buyer actually understood what they were buying or not.
A dealer is not allowed to misrepresent what their gap insurance costs or what it will cover in the event it is used, and a buyer should take care to understand these terms before agreeing to purchase it. Dealers understand that gap insurance is rarely used and that they can make money off offering it as a little bit of peace of mind for the buyer. The low risk of there being an issue where the buyer uses the insurance is enough for some less scrupulous dealers to make misrepresentations or simply mis-characterize certain terms, such as the amount of coverage, to influence an ignorant or tired buyer. If a dealer forces a customer to purchase gap insurance by using threats or unreasonable language or by refusing to sell the vehicle without gap insurance, the buyer is entitled, at the least, to a refund of the gap insurance price.