The Consumer Financial Protection Bureau (CFPB) is expected to sue auto lender Santander over its GAP (guaranteed auto protection) insurance practices, according to a new report from Reuters.
The news agency cites two unnamed sources with knowledge of the impending lawsuit who spoke on the condition of anonymity.
What is GAP insurance and why would you need it?
If you’ve ever bought a new car, you’ve probably had a salesperson talk to you about GAP insurance.
It’s an insurance product designed to cover the gap between the outstanding balance on your auto loan and the market value of your vehicle if your vehicle gets totaled in an accidents or stolen before you’ve paid it off completely.
Here’s a look at some hypothetical numbers to give you a clearer picture of how GAP coverage function…
Let’s say you finance a new vehicle for $34,000. Then a week after driving off the lot, that car is declared a total loss in a serious accident.
Fortunately, you escape the accident unharmed and expect your insurance company to pay out $34,000 so you can pay off your loan and get into a new vehicle.
But here’s the catch: The minute you drove that vehicle off the dealer lot, the value of it depreciated to $31,000.
So now your new car is totaled, you can’t drive it and you still owe the $34,000 loan.
Your insurer, however, only wants to pay you $31,000 because that’s the market value of your totaled car.
This the kind of case where GAP insurance would step in with the $3,000 difference so it doesn’t have to come out of your pocket!
Reuters reports the CFPB’s imminent legal action against Santander is the culmination of investigations at the state and federal level into allegations that consumers were steered into GAP insurance when it wasn’t needed.
In addition, other consumers are believed to have paid higher interest rates than they should have when GAP coverage was included at the dealership.
Check out these alternatives to auto dealer GAP coverage
Nobody likes to get ripped off at the auto dealer with add-ons like GAP coverage, which typically gets rolled into the cost of your loan.
Try these alternatives instead.
Buy GAP coverage through your auto insurer
By doing this, you’re likely to pay half or even a quarter of the price you would pay at the dealership, according to Car and Driver. That’s because your insurer won’t ridiculously mark it up like the dealer will.
Car and Driver reports that buying through your own insurer will sometimes only add as little as $20 to your annual premiums. Of course, that figure will vary by location, driving record and vehicle type!
Pay cash for a reliable used car
GAP insurance is really a solution to a problem that shouldn’t happen in the first place. There would be no need for GAP coverage if consumers didn’t buy vehicles with no money down.
The problem, as mentioned earlier, is the rapid depreciation of new vehicles the minute they drive off the lot. Since you put no money down, that huge spread is what creates a gap that need to be filled.
But what if your buying decision never allowed that gap to be created in the first place?
Buying a reliable used car is money expert Clark Howard’s preferred way for you to get into a vehicle. It’s even possible to pay cash for a cheap but good ride. Here’s a look at the best used cars for between $5,000 and $10,000.