Gap Insurance: Legal For Military?

In 2017, a change to the Military Lending Act (MLA) caused confusion over whether members of the military could finance Guaranteed Asset Protection (GAP) insurance. The MLA is designed to protect active-duty military members, their spouses, and dependents from predatory lending practices. The 2017 change meant that military members could no longer finance GAP insurance, which covers the difference between the actual value of a vehicle and the loan balance. This change has created concerns about fair lending practices and the financial risk to service members in the event of a total loss of their vehicle. However, as of 2020, the Department of Defense has repealed this guidance, allowing military members to once again access GAP insurance.

Military Lending Act and GAP insurance

The Military Lending Act (MLA) was enacted by Congress in 2006 and implemented by the Department of Defense (DoD) in 2007 to protect active-duty military members, their spouses, and dependents from predatory lending practices. While the automotive industry initially considered itself exempt from the MLA, a December 2017 interpretation by the DoD caused confusion and concern for car dealerships, especially those near military bases.

The new interpretation stated that if "credit-related costs" are financed, the transaction is subject to the MLA, which includes a 36% Military Annual Percentage Rate (MAPR) cap on total charges. This led to the classification of Guaranteed Auto Protection (GAP) insurance as an "ancillary product," and thus regulated by the MLA. GAP insurance covers the difference between what is owed on a financed vehicle and its insurance payout in the event of theft or damage, as new vehicles can depreciate quickly.

To comply with the MLA, dealerships have had to stop offering GAP insurance to military members or stop financing it. This has resulted in concerns about fair lending practices and reduced profitability for dealerships, as GAP insurance has been a significant revenue source. There are also worries that military families may now face greater financial hardship when a vehicle is lost or destroyed.

Some dealers have chosen to stop offering GAP insurance altogether, while others have implemented processes to identify military members and their dependents to exclude them from GAP insurance offerings. Failure to comply with the MLA can result in civil and criminal liability for dealerships.

The interpretation has negatively impacted military members, with some facing financial distress due to the unavailability of GAP insurance. Industry groups, such as the National Automobile Dealers Association (NADA), have urged the DoD to reconsider its interpretation, highlighting the potential harm to service members.

The new interpretation of the Military Lending Act has created a challenging situation for car dealerships and negatively impacted military members. While the MLA aims to protect service members from predatory lending, the inclusion of GAP insurance in its scope has unintentionally limited their access to valuable financial protection. The situation underscores the complex interplay between consumer protection regulations and the dynamic nature of lending and insurance practices.

GAP insurance for military members in California

GAP insurance is an additional coverage that can be added to your auto insurance. It covers the balance of a loan or lease if your vehicle is destroyed, stolen, or a total loss. This is especially important if you have paid minimal or zero down payment, have financing terms longer than 60 months, or have rolled negative equity into a new car purchase.

The Military Lending Act (MLA) and GAP Insurance

The Military Lending Act (MLA) was enacted by Congress in 2006 to protect active-duty military members, their spouses, and dependents from predatory lending practices. In December 2017, the Department of Defense (DoD) issued new guidance stating that if "credit-related costs" are financed, the MLA applies and the total charges may not exceed a 36% Military Annual Percentage Rate (MAPR). This has created confusion and concern for car dealers, especially those near military bases, as it means military members cannot finance GAP insurance.

While military members in California cannot finance GAP insurance due to the MLA, they can still legally purchase GAP insurance out of pocket. The cost of GAP insurance in California varies depending on factors such as the value of the car, the insurance company, location, and age. The average cost of GAP insurance in California is $2,238 per year, but it can be cheaper or more expensive depending on the city and the insurance provider. For example, Progressive offers GAP insurance in California at an average annual rate of $1,492, while the average annual rate in Los Angeles is $2,755.

It is important to note that GAP insurance is optional in California, but it may be required by your lender if you have a lease or loan agreement. You can drop the coverage once your car loan becomes lower than the value of your car.

Why can't military members add GAP insurance at a dealership?

In 2017, the Department of Defense (DoD) issued new guidance on the Military Lending Act (MLA), a law designed to protect active-duty military members, their spouses, and dependents from predatory lending practices. This new interpretation of the MLA means that military members cannot finance Guaranteed Asset Protection (GAP) insurance at a dealership.

When a customer purchases a new vehicle, it begins to depreciate as soon as it is driven off the lot. If a financed vehicle is totaled due to theft or damage soon after purchase, the borrower may owe more on the vehicle than their insurance covers. GAP insurance covers the difference between what is owed on the vehicle and the insurance payout. Dealerships often include the cost of GAP insurance in the overall vehicle loan.

Under the new guidance from the DoD, any loan made to an active-duty service member, their spouse, or dependent that includes GAP insurance must comply with the MLA's requirements. This includes a 36% Military Annual Percentage Rate (MAPR) mandate and additional disclosure requirements. As a result, some dealerships have stopped offering GAP insurance altogether, while others have stopped selling it to military members and their families.

Military members can still legally purchase GAP insurance out of pocket as long as they don't finance it. They may also be able to obtain GAP insurance through their current car insurance carrier or by shopping around for other insurance companies that offer this type of coverage.

How does GAP insurance work?

GAP insurance, or Guaranteed Asset Protection insurance, is an optional product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays if your car is stolen or totalled. This type of insurance is important if you have paid a minimal or zero down payment, have financing terms longer than 60 months, have rolled negative equity into a new car purchase, or have leased a vehicle.

The minute you purchase a new vehicle, it begins to depreciate. The average depreciation on a new vehicle is 20% in the first year of ownership. This depreciation can leave a gap between what you owe and the car's value. For example, if you owe $25,000 on your loan and your car is only worth $20,000, gap insurance will cover the $5,000 gap, minus your deductible.

GAP insurance does not include unpaid finance charges, excess mileage, or any other charges or expenses associated with the loan or lease. It is important to note that GAP insurance is not required by any insurer or state, and you can decline it if it is included in your loan. However, some leasing companies may require you to purchase it. GAP insurance can be removed from your policy at any time, and it is typically only needed in the first few years of new car ownership.

In terms of cost, the price of GAP insurance can vary. If you choose to finance a GAP policy into your loan, it will increase the total loan amount and the total interest paid over time. It is recommended to compare prices and coverage before purchasing GAP insurance, as it can be purchased from your auto insurance company, direct lenders, or car dealerships.

Is GAP insurance worth it?

GAP insurance is worth considering if you're concerned about the financial implications of your new vehicle being stolen or written off. GAP insurance is a supplementary coverage that can be added to your auto insurance policy. It covers the difference between your car's actual cash value (ACV) and the amount you currently owe on your loan or lease if your car is stolen or written off in a traffic accident.

GAP insurance is particularly important in the following instances:

• You paid a minimal or zero down payment.
• You have financing terms longer than 60 months.
• You rolled negative equity into a new car purchase.
• You leased a vehicle.

GAP insurance is generally inexpensive and can give you peace of mind, especially in the first few years of new car ownership when the value of the vehicle is worth less than what is owed on the loan. However, it may not be necessary if any of the following apply:

• You made a down payment of at least 20% of the car's value at the time of purchase.
• You expect to pay off your car loan in less than five years.
• You financed or leased a vehicle that holds its value.

The cost of GAP insurance depends on several factors, including the actual cash value of your vehicle when you purchase the policy, your previous claims history, and whether you purchase it through a lender, an insurance company, or a dealership. If you get GAP insurance from a lender, you can expect to pay a flat fee of $500 to $700 on average. Insurance companies typically charge $20 to $40 a month for their add-on policies, while dealerships may offer GAP insurance for an increased cost.

In summary, whether or not GAP insurance is worth it depends on your individual circumstances. If you are concerned about owing more on your auto loan than your car is worth, GAP insurance can provide valuable protection. However, if you have made a substantial down payment or expect to pay off your loan quickly, it may not be necessary.

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