Is GAP insurance for an auto loan mandatory?

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Is GAP insurance for an auto loan mandatory?

I bought a car last week. The dealer got me a finance company. But according to the dealer, the finance company insisted that I buy GAP insurance for the cars value before they would approve the loan. My friend was in the room and witnessed it; even though I stated I had bought it as a rider on my auto insurance policy which was much cheaper.

Asked on May 1, 2011 under General Practice, Connecticut

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Finance companies, banks, lenders, etc. are not forced to make loans--that is, they voluntarily choose to loan to people. (The only restriction is no discrimination against a protected category; e.g. can't discriminate on a racial basis in lending.) Given that they do not have to loan to anyone, they can put requirements or restrictions on their loan. It is perfectly legal, therefore, for a lender or financing company to specify that a certain type and amount of insurnace be purchased before they will make the loan; this is analogous to a bank requiring adequate homeowner's insurnace, naming the bank as a payee, prior to approving or making a mortgage. You can look for a different lender, of course; but any lender has the right to specify the insurance you need to have.


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