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

The capitalized cost reduction in a lease reduces the adjusted cap cost, functioning the same way a down payment reduces the financed amount in a purchase loan.

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

For leases, the GAP benefit bridges the difference between the primary insurer's ACV settlement and the total lease payoff, which includes termination fees and remaining payments.

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

Negative equity—also called being 'underwater'—occurs when a borrower owes more on the loan than the car is worth, which is precisely the exposure GAP is designed to cover.

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

A substantial down payment reduces the initial loan balance relative to the vehicle's value, thereby minimizing or eliminating negative equity and the associated GAP exposure in the early months.

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

Longer loan terms slow the rate at which principal is paid down, extending the period during which the loan balance exceeds the depreciating vehicle's ACV.

(GAP) Guaranteed Asset Protection Certified Practice Test

(GAP) Guaranteed Asset Protection Certified Practice Test

GAP GAP Loan & Lease Fundamentals