GAP GAP Loan & Lease Fundamentals

Question 1

In a vehicle lease agreement, the 'capitalized cost reduction' is equivalent to which concept in a loan transaction?

Accepted Answer

Down payment

Answer

Monthly payment

Answer

Residual value

Answer

Money factor

Question 2

For a leased vehicle, the 'gap' covered by a GAP product is the difference between the ACV and the:

Accepted Answer

Remaining lease payoff, including any early termination liability

Answer

Residual value stated in the lease contract

Answer

Total of all remaining scheduled lease payments

Answer

MSRP of the vehicle at lease inception

Question 3

What is 'negative equity' in the context of vehicle financing as it relates to GAP?

Accepted Answer

When the outstanding loan balance exceeds the vehicle's current market value

Answer

When the borrower's credit score is below the lender's threshold

Answer

When the vehicle depreciates to zero value

Answer

When the lender charges a higher interest rate than prime

Question 4

A borrower finances a vehicle with a 20% down payment on a new car. How does this affect the likelihood of a significant GAP exposure early in the loan?

Accepted Answer

It reduces early GAP exposure because the loan balance starts below the vehicle's ACV

Answer

It increases GAP exposure because the loan term must be extended

Answer

It has no effect on GAP exposure

Answer

It eliminates all GAP exposure for the life of the loan

Question 5

Which loan characteristic most significantly increases the period of negative equity and GAP exposure?

Accepted Answer

Extended loan term (e.g., 72–84 months)

Answer

Higher annual percentage rate (APR)

Answer

Larger down payment

Answer

Shorter amortization schedule

Question 6

When a consumer rolls negative equity from a trade-in vehicle into a new car loan, this practice is called:

Accepted Answer

Negative equity roll-over or upside-down trade-in

Answer

Loan subordination

Answer

Equity bridging

Answer

Balance transfer financing