Finding ways to delight borrowers with ancillary products
Credit unions may hear or witness anecdotes from their auto loan borrowers where a vehicle is involved in an accident or has been stolen. The toughest stories to listen to are the ones where the borrower still owes a balance on the loan and the actual cash value (ACV) is less than what is owed on the vehicle. According to Edmunds.com, in 2016 more than six million vehicles were traded in by people who were upside-down on their car loan.
Experian shares that 75% of new vehicles are financed for five years or more, and well over half of used car loans have terms of at least five years. This trend continues to grow each year, which creates a greater risk to your institution. Longer loan terms mean there’s a greater chance the vehicle could be involved in a covered event.
The Breakdown
Often, borrowers believe that their car insurance will cover the complete cost of a repair. This is not always the case, especially when the vehicle’s value has depreciated significantly since purchase. For example, if a borrower’s vehicle had an ACV of $13,000, but owed around $15,000 on the loan at the time of the accident or theft—that $2,000 is considered a ‘gap’ and is still owed to the institution. Generally, a borrower’s insurance will only cover up to the ACV, less a borrower’s deductible.
So then, what options do borrowers have when purchasing a vehicle to protect their investment, and how does your credit union fit into the mix? Guaranteed Asset Protection (GAP) Insurance has been around for many years and really hasn’t changed much. It works to protect people who find themselves in those gap situations. If the borrower above had GAP, the coverage would have protected her and paid out the $2,000 balance to her credit union.
In the end, though, it’s about helping to build long-term loyalty and trust between a borrower and your credit union, specifically during those ‘what if’ scenarios. Covering their gap is great but why not take it another step further, to truly ‘delight’ the borrower?
Vehicle Protection Evolved
There is a host of variations on GAP coverage, such as GAP Advantage and GAP with PowerBuy™. GAP with PowerBuy is where we see the vehicle protection industry moving toward in the future. The product was built to include a depreciation benefit that can provide additional funds a borrower can use toward the purchase of their next vehicle when financed through your credit union. Now that’s a borrower ‘delight’ moment!
GAP with PowerBuy makes sense for borrowers who make a large down payment on their vehicle or those without a need for traditional GAP but are still concerned about vehicle depreciation. Using the borrower from earlier as an example, GAP with PoweBuy with a $5,000 benefit, for example, would have covered the $2,000 gap and provided her another $3,000 to use toward her next vehicle.
Offering ancillary products like GAP provides additional value to your loan process by generating an additional source of income for your institution—however—the most significant benefit is the relationship you build with your borrower as a result. Should a covered event occur, your borrower can rest easy knowing that they have coverage and your credit unions will be seen as the ‘hero.’
Click to download our 2018 State of Auto Lending Ebook to learn about the future of the auto lending industry.
