Shift gears to help protect loans from vehicle depreciation

As times and vehicle purchase behavior change, the auto lending industry must adapt to stay competitive and successful. One of the newer challenges facing our industry these days is an increase in the speed of vehicle depreciation.

The law of supply and demand can help explain why vehicle values are decreasing more rapidly: as supply increases, demand and price are driven down. With leases accounting for a quarter of new vehicle movement, we have a huge segment of the population who regularly takes possession of a new vehicle, then returns it within a few years. The United States now has a larger supply of late-model-year, high-quality used cars than we’ve ever had before. As a result, used cars are losing value more quickly. According to data from J.D. Power, almost all segments of vehicles depreciated by double digits in 2016, and that depreciation rate is expected to accelerate every year for the foreseeable future.

While less expensive cars are probably welcome news to prospective buyers, decreasing value negatively affects your members and everybody else who owns a vehicle.

An evolution in vehicle protection

Fortunately, as vehicles and buyers have evolved, so have loan protection products. Modern loan protection products, like Guaranteed Asset Protection (GAP) with PowerBuy®, include benefits to cover not only unpaid loan balances but also vehicle depreciation. By offering GAP with PowerBuy, which includes depreciation reimbursement, you can offer your members protection over the life of their auto loan.

Protection against vehicle depreciation expense

Here’s an example of how GAP with PowerBuy works to protect members against decreasing vehicle values.

  • Let’s say Denise buys a car for $24,000.
  • She owes $16,000 on her vehicle loan when her car is stolen.
  • She receives the depreciated value, $18,000, from her auto insurer and has paid off her loan.
  • Denise experiences a $6,000 loss due to vehicle depreciation and now must secure funds to replace her car.
  • If Denise had purchased GAP with PowerBuy with a $5,000 benefit when she financed her car, her situation would be very different. GAP with PowerBuy would provide a $5,000 depreciation benefit to be applied toward a replacement vehicle financed through her original lender.

Additional member protection

According to TransUnion, one of the country’s largest credit bureaus, auto financing amounts are not expected to grow year to year the same way we’ve come to expect. As a reaction to long loan terms and quickly decreasing car values, for the next several years, lenders are expected to request larger down payments from buyers than ever before, decreasing loaned amounts. Regardless of their loan balances, buyers will experience accelerating depreciation.

For members making large down payments, a product like GAP with PowerBuy would cover depreciation loss and provide funds toward a replacement vehicle.

Since the auto lending industry moves with the economy and technology, we know to expect constant change. To stay successful, we must keep our eyes on the road ahead and work to proactively introduce new products and services that speak to anticipated market and customer changes. Learn more about current auto lending trends and ideas for improving the success of your auto lending program in SWBC’s free ebook, 2018 State of Auto Lending.

Ronni Martinez

Ronni Martinez

Ronni Martinez joined SWBC in 1998 and is currently the Vice President of Product Management for SWBC’s Financial Institution Group. Prior to joining SWBC, she held positions in the ... Web: Details