Car Loan Add-Ons: GAP, Service Contracts and What You Can Refuse

What the finance office will offer

After you agree on a price, you usually move to a finance manager who prepares the contract and offers extra products. The FTC lists GAP, window etching and service contracts as common ones; credit insurance, which pays the loan if you die or become disabled, is another. You can ask what each one costs, what it adds over the life of the loan, and what limits it has, and you can say no.

• Not required by federal law: credit insurance. If a dealer makes it a condition of the financing, the FTC says its cost must be counted in the APR.
• Required GAP: if a lender truly requires GAP, the CFPB says its cost belongs in the finance charge and the APR. Ask where the contract says so.
• Slipped-in products: the FTC says it is not acceptable for a dealer to tuck add-ons into the deal or lie about them. Read every line before you sign.

GAP: insurance policy or loan waiver

Car insurance pays what the car is worth when it is totaled or stolen. If you owe more than that, the rest of the loan is still due. GAP is meant to close that hole. It comes in two forms that look alike on a sales sheet but work differently.

Read the exclusions. Maryland's guidance lists examples such as overdue payments, lease charges for excess wear, and the cost of financed extended warranties or credit insurance, which GAP may not cover. The CFPB adds that these products often have eligibility limits. GAP matters most when the loan starts close to or above the car's value: a small down payment, a long term, or negative equity rolled in from a trade-in. With a large down payment it may never pay anything. Before you buy at the dealer, ask your own insurer for a price.

Service contracts are not warranties

A warranty comes with the car and is included in its price. A service contract is a separate purchase from the carmaker, the dealer or an independent company, which agrees to pay for certain repairs. The FTC notes that federal law does not treat it as a warranty, and that prices range from several hundred to several thousand dollars.

• Overlap: a contract that starts while the factory warranty still runs may pay for little at first. Compare the dates and miles.
• Coverage: few contracts cover everything. Accident damage and normal wear are usually excluded; some pay only for mechanical breakdowns or cap labor.
• Costs per visit: many charge a deductible each time the car is repaired.
• Who pays claims: an administrator often decides claims. Find out who it is and what happens if it or the dealer goes out of business.
• Upkeep rules: skipping the maintenance schedule can void coverage, so keep every service record.

You do not have to buy one the day you buy the car. Be wary of later calls, texts and letters with titles like "final warranty notice": the FTC warns they often do not come from your dealer or carmaker.

What financing an add-on costs

When an add-on is rolled into the loan, you pay its price plus interest for the full term. A $2,500 service contract financed at 7% APR for 60 months adds $49.50 to each payment. Over five years that is $2,970, of which $470 is interest. The car payment calculator shows the effect on your own loan.

Add-ons also raise the amount financed without raising the car's value. That makes the loan larger relative to the car, which is the gap GAP coverage is sold to fill.

Canceling an add-on and getting money back

The CFPB says you have the right to cancel optional add-on products at any time, and you may be entitled to a refund if you sell, refinance or pay off the loan early. How much comes back depends on the product contract and on state law. The contract should explain how the refund is figured, for example prorated for the time or miles already used, and whether a cancellation fee applies.

1. 1 Find the paperwork. Each product has its own contract or form with the cancellation terms. If you lost it, ask the lender, the provider or the dealer.
2. 2 Send a written cancellation request to the provider or administrator named in the contract, and keep a copy.
3. 3 Ask where the refund goes. If the product was financed, the refund may be credited to your loan balance instead of paid to you.
4. 4 Follow up. If the refund does not arrive, contact the dealer and the provider, then your state attorney general or the CFPB.

How to decline add-ons at the dealer

• Ask for the price of the car and the loan before any products are added, then compare the final contract with it.
• Ask for each product's price in dollars, not as a change in the monthly payment.
• Say plainly that you do not want a product, and check that it is gone from the contract before you sign.
• If you want GAP or a service contract, get a quote from your insurer, bank or credit union first.

The next chapter, the out-the-door price, shows where add-ons appear among the taxes and fees. If an unwanted product ended up on a signed contract, see how to complain about a dealer.

Questions people ask