Depreciation coverage your members will appreciate
These days, owning a vehicle is a tall order. Auto prices, heavily impacted by supply chain issues, have soared to record highs, with the average new vehicle price redlining at roughly $49,000. Add to that rising interest rates, which Edmunds has averaging at 7% and 11.4 % for new and used cars, respectively.
That’s not the only thing making it tough to stay on the road. According to the U.S. Bureau of Labor Statistics, the cost of vehicle repair is up 23% since last March, spurred by inflation and labor shortages.
Credit union leaders who understand these dynamics know the impact it can have on the value of a vehicle. By proactively offering their members the right coverage options at loan close, they not only can shield their portfolios against charge-offs down the road, but they also can keep members happily returning for their next auto purchase.
The impact of changing lending habits for credit unions and their members
To manage the high cost of vehicle ownership, some consumers are opting for long-term loans to get behind the wheel. These lengthy loan terms—usually six or seven years—can offer some financial relief month-to-month for car buyers, but the long-term cost can have a negative financial impact on both members and credit unions.
As borrowers look to keep their vehicles longer, the need to protect that investment long term becomes more important. While this creates the opportunity to offer products like vehicle service contracts or vehicle protection products, one area often overlooked is the depreciation of the vehicle over the term of the loan.
According to Kelley Blue Book, cars can lose about 20% of their original value in the first year. With new vehicles selling above the Manufacturer Suggested Retail Price (MSRP) and prices for used vehicles at record highs, we could see this depreciation rate increase significantly over the next few years.
What does this mean for your members? The vehicle they purchase—or refinance—today may be worth much less down the road, which could create a significant financial burden if faced with a total loss or unrecovered theft of the vehicle.
As the vehicle value drops, your members may find that depreciation has taken a bigger bite out of their investment, leaving them with a lower payment from their primary carrier and nothing to show for the payments they have made, their original down payment, or positive equity at refinance.
How credit unions can help
In response to this new lending paradigm, credit unions can provide their members with cutting-edge coverage to decrease exposure to vehicle depreciation while increasing retention when members are shopping for a replacement vehicle.
PowerBuy® Equity Protection (PEP) provides revolutionary depreciation protection, with up to 60 months of coverage that is independent from Guaranteed Asset Protection (GAP). PEP is a great option for members who want to put themselves in a positive equity position when purchasing or refinancing a new vehicle or as an added benefit to their GAP protection. Here’s how it works:
A member purchases or refinances a vehicle for $37,000 and opts for PowerBuy Equity Protection. A year later, the member’s car is totaled after an accident. Insurance pays out the car’s ACV, which is $35,000. With PowerBuy, they can return to the same credit union to finance their replacement vehicle and apply the $2,000 difference as a loyalty benefit for returning.
PowerBuy Equity Protection helps your credit union stand apart in a competitive market by providing a unique new benefit for your members if they experience a total loss or unrecovered theft.
At the same time, the coverage creates a powerful incentive to return to your credit union, guiding members back into your auto loan portfolio pipeline. To learn more about earning extra income now and driving repeat loan business later, visit our website.
