GAP 101
Guaranteed Asset Protection Waivers are an important tool for consumers to protect their financial interest in one of their most valuable assets: their financed vehicle. GAP, for short, is a voluntary product offered by dealers and lenders to car purchasers to cover all or part of the remaining balance when a vehicle is a total loss or unrecovered theft. Given that in Q4 2024, 25% of consumers that traded in a vehicle were already underwater at the start of their car loans (a 61% increase from 2022), this type of coverage can be invaluable to a consumer facing the unfortunate loss of their vehicle. What’s great for borrowers is that GAP waivers are ubiquitous in dealerships across the country and easily financed with the purchase of a new vehicle. Despite the obvious benefits of GAP waiver, pundits and industry participants sometimes get it wrong when offering advice or commentary to consumers, policymakers and market participants. With this in mind we offer the following foundational information.
GAP is intended to help consumers wipe away debt for a normally amortizing loan when their car is no longer drivable – for many, it helps them get into that next financed vehicle in a much better equity position. And not all GAP is created equal. There are 2 major types of GAP, which is where some stakeholders and commentors get tripped up:
- “GAP waiver” – The most pervasive form of GAP with the most expansive protection, offered through auto dealers nationwide and many lenders.
- “GAP rider” – Typically an endorsement to primary auto physical damage. If the auto insurance ends, GAP rider ends.
Why is this important? Because words matter. GAP waiver – the consumer product we represent and that pundits write about – is not insurance. There is no insurance premium paid by consumers, yet we find many writers call it “GAP insurance” and they use the insurance term “premium” rather than the more accurate “fee.”
Now, there is typically insurance at play. A special insurance policy called a Contractual Liability Insurance Policy, or CLIP, can provide the financial backing for the promises made by the seller in a GAP waiver. In this way, there is a second layer of protection whereby the lender can simply waive all or part of the remaining balance according to the terms of the GAP waiver (the first layer), and then get reimbursed for that amount from the CLIP (the second layer). Ultimately, consumers can rest assured there is a financial backstop in the event they experience a covered loss under their GAP waiver.
We hope you found this material informative. In our next article, we’ll explore the consumer side of GAP waiver.