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What Happens in the Finance and Insurance Office? | Edmunds

Edmunds.comEdmunds.com Posts: 9,857
edited April 18 in Editorial
imageWhat Happens in the Finance and Insurance Office? | Edmunds

F&I is the last stop in the car-buying process. Here's what you need to know about it and the products you will be offered there.

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Comments

  • karhill1karhill1 Posts: 152
    GAP insurance is usually a very expensive bet. As noted in the article, GAP kicks in should you total the car or have the car stolen.

    The first question to ask is how likely this event to happen to you? I have been driving for 40 years and I have yet to total a car or have a car stolen.

    The second question to ask is what is the expected payback should such an event happen. For example, if you owe $25,000 and the value of the car is $23,000, your risk is $2,000. Most dealers attempt to sell GAP for hundreds of dollars which, of course, is quoted as a monthly payment such as $15 a month. That $15 a month is $900 plus interest over a 60 month loan. A buyer needs to assess if spending up to $900 for an unlikely payout of $2,000 is a good bet.

    The third question is can this coverage be purchased elsewhere at a much lower cost. Yes it can. Many insurance companies offer this type of coverage for around $150.

    The fourth is knowledge of how dealers price GAP and other products. Dealers purchase the GAP from an outside source. This outside source sells the GAP at a profit. The dealer then adds its profit as well as a profit for the F&I manager. For example, the third party may conclude based on research, its average payout will be $80. The third party will sell the GAP to the dealer for $150. The dealer and F&I manager will add profit. They will sell to the buyer for $600.

    This manner of pricing is the same for all products sold in the F&I office. All are overpriced and of dubious value in real life. And all can be purchased elsewhere for a much lower cost.

    Be smart, just say no to any product pitched by a smiling F&I sales person, called manager.
  • kyfdxkyfdx Posts: 68,105
    The F&I office is where good deals go to die. :(

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  • MichaellMichaell ColoradoPosts: 63,238
    @karhill1 - while I agree with your points, not everybody has the $2000 lying around to cover the difference between the current value and the outstanding loan amount. And, that number could be much, much higher depending on the type and price of the car that is bought.

    A little bit of extra money each month may buy piece of mind - just because you haven't had an accident in 40 years doesn't mean you couldn't have one tomorrow. Dice - and the stock market - don't have a memory.

    If you can self-insure, go for it, but I'm guessing that isn't the case for 90% or more of the folks buying new cars.

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  • kyfdxkyfdx Posts: 68,105
    I wouldn't buy GAP insurance from a dealer.

    It's just not a good value. If you don't have the ability to cover those losses, you probably shouldn't commit to a $20K-$40K financial obligation.

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  • treys17treys17 Posts: 1
    GAP insurance is definitely a case-by-case scenario.

    Cases where you would be less likely need to need GAP Insurance --
    - Trading in a vehicle that you have positive equity
    - Putting a significant down payment down
    - Purchasing a pre-owned vehicle
    - Taking a shorter term loan (such as 48 or 60 months)
    - Financing at a lower interest rate

    Cases where you would be more likely to need GAP Insurance --
    - Trading in a vehicle that you have negative equity
    - Putting little or no money down
    - Purchasing a new vehicle (will depreciate rapidly in the first 2 years)
    - Taking a longer term loan (72+ months)
    - Financing at a higher interest rate

    If a customer is interested in GAP insurance, we've been able to negotiate the dealer down to $500. That equates to $7.60 per month (based on a 72 month loan at 3%). For $7.60 per month, you save yourself a lot of headache if your vehicle is totaled or stolen.

    Another little known fact, is that GAP can be cancelled at any time, and a prorated refund will be sent to your bank. We recommend to our clients who do want to purchase GAP insurance to monitor their approximate trade-in value and payoff after a couple of years. Once they reach a point that they're trade-in value is equal to or greater than their loan payoff, they can cancel their GAP insurance, which will lower the amount they owe on the vehicle. If they end up keeping the GAP insurance for 36 months, it ends up costing them about $250 or so.

    Trey
    www.callowayauto.com
  • ken117ken117 Posts: 249
    Michaell, I am pretty sure you are correct and many, perhaps most, people do not have $2,000 or more lying around to cover a difference between the current value of a vehicle and the outstanding loan amount. But, for most folks, it is not likely they will ever encounter that situtation.

    How many vehicles are totaled or stolen during the first few years when the difference in value is significant?

    At best GAP coverage is a bet. As with all bets, the odds are stacked in the house's favor. The house is, of course, the dealer and that friendly F&I sales person offering a plethora of products, all overpriced and all of questionable value.

    GAP coverage, like every product sold at a car dealer, is priced to make profit for both the GAP coverage provider and the dealer/F&I manager. That is simple cost accounting. The provider employs experts who determine the average payout. The provider then sells to the dealer for a profit. The dealer then sells to the customer at another profit.

    That is too much profit. All products sold in a dealer's F&I office have too much profit built in to the price.

    Buyers need to ask themselves is spending up to $700 a wise way to spend money to cover the unlikely event the buyer may need to come up with $2,000 under a GAP coverage situation? Really the amount would be $1,300 as the buyer would have the $700 he or she may have paid for GAP at a dealer.

    On the flip side, in the likely event the car buyer never encounters such a GAP coverage situation, the buyer and not the dealer has that $700.

    Yes, GAP coverage may provide a level of peace of mind for some buyers. Some folks do derive satisfaction from being insured against all possible financial hits. For them the cost of coverage is offset by the peace of mind they gain.

    The fact is, if a car buyer really wants GAP type coverage, similar coverage to what a dealer provides can be purchased from other sources for far less than the dealer will charge. Do not buy from the dealer and cut out one level of profit.
  • MichaellMichaell ColoradoPosts: 63,238
    ken117 said:

    Michaell, I am pretty sure you are correct and many, perhaps most, people do not have $2,000 or more lying around to cover a difference between the current value of a vehicle and the outstanding loan amount. But, for most folks, it is not likely they will ever encounter that situtation.

    How many vehicles are totaled or stolen during the first few years when the difference in value is significant?

    At best GAP coverage is a bet. As with all bets, the odds are stacked in the house's favor. The house is, of course, the dealer and that friendly F&I sales person offering a plethora of products, all overpriced and all of questionable value.

    GAP coverage, like every product sold at a car dealer, is priced to make profit for both the GAP coverage provider and the dealer/F&I manager. That is simple cost accounting. The provider employs experts who determine the average payout. The provider then sells to the dealer for a profit. The dealer then sells to the customer at another profit.

    That is too much profit. All products sold in a dealer's F&I office have too much profit built in to the price.

    Buyers need to ask themselves is spending up to $700 a wise way to spend money to cover the unlikely event the buyer may need to come up with $2,000 under a GAP coverage situation? Really the amount would be $1,300 as the buyer would have the $700 he or she may have paid for GAP at a dealer.

    On the flip side, in the likely event the car buyer never encounters such a GAP coverage situation, the buyer and not the dealer has that $700.

    Yes, GAP coverage may provide a level of peace of mind for some buyers. Some folks do derive satisfaction from being insured against all possible financial hits. For them the cost of coverage is offset by the peace of mind they gain.

    The fact is, if a car buyer really wants GAP type coverage, similar coverage to what a dealer provides can be purchased from other sources for far less than the dealer will charge. Do not buy from the dealer and cut out one level of profit.

    I get it - you're comparing a probability (totaling the car) with a certainty (the money paid for the GAP coverage). Yes, it's a bet. But, it also provides piece of mind.

    I don't have the option of acquiring GAP insurance through my insurance provider here in Colorado - trust me, if I could do it for less cost, I would.

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