GAP GAP Loan & Lease Fundamentals 1 — Questions and Answers
Question 1: In a vehicle lease agreement, the 'capitalized cost reduction' is equivalent to which concept in a loan transaction?
- Down payment (Correct answer)
- Monthly payment
- Residual value
- Money factor
Correct answer: Down payment
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:
- Remaining lease payoff, including any early termination liability (Correct answer)
- Residual value stated in the lease contract
- Total of all remaining scheduled lease payments
- MSRP of the vehicle at lease inception
Correct answer: Remaining lease payoff, including any early termination liability
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?
- When the outstanding loan balance exceeds the vehicle's current market value (Correct answer)
- When the borrower's credit score is below the lender's threshold
- When the vehicle depreciates to zero value
- When the lender charges a higher interest rate than prime
Correct answer: When the outstanding loan balance exceeds the vehicle's current market value
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?
- It reduces early GAP exposure because the loan balance starts below the vehicle's ACV (Correct answer)
- It increases GAP exposure because the loan term must be extended
- It has no effect on GAP exposure
- It eliminates all GAP exposure for the life of the loan
Correct answer: It reduces early GAP exposure because the loan balance starts below the vehicle's ACV
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?
- Extended loan term (e.g., 72–84 months) (Correct answer)
- Higher annual percentage rate (APR)
- Larger down payment
- Shorter amortization schedule
Correct answer: Extended loan term (e.g., 72–84 months)
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.
Question 6: When a consumer rolls negative equity from a trade-in vehicle into a new car loan, this practice is called:
- Negative equity roll-over or upside-down trade-in (Correct answer)
- Loan subordination
- Equity bridging
- Balance transfer financing
Correct answer: Negative equity roll-over or upside-down trade-in
Rolling negative equity from a trade-in increases the new loan balance above the new vehicle's value, immediately creating significant GAP exposure from day one.
GAP GAP Loan & Lease Fundamentals 1
In a vehicle lease agreement, the 'capitalized cost reduction' is equivalent to which concept in a loan transaction?