On the heels of an accident or theft, borrowers are left with damage, possible injuries, and the challenge of finding a new vehicle - all with no equity. GAP is often the fallback loan add-on offered to borrowers to protect against potential total loss. However, recent trends indicate that GAP may not offer the best total loss coverage for your borrowers.
There are three trends impacting total losses:
- As interest rates rise, borrowers are opting for longer loan terms to make monthly payments more manageable. In fact, loan terms for new vehicles are edging towards 70 months. The longer the loan term, the higher the probability for a total loss to occur.
- States are increasing restrictions on loan-to-value (LTV) ratios for the sale of GAP. The emerging best practice is to not sell GAP on loans with < 80% LTV ratio. Without GAP, borrowers are exposed in the event of a total loss.
- MSRPs are rising at astonishing rates but vehicles are still quickly depreciating. Simultaneously, more vehicles are being deemed total loss. These factors are making it increasingly difficult for borrowers to replace a totaled vehicle.
Filling the Gap
State regulations along with considerations that the borrower may not receive benefits are two factors hindering the sale of GAP. When the sale of GAP is prohibited, Depreciation Protection Waiver (DPW) can stand in the gap as an alternative to protect the borrower. Unlike GAP that covers the negative equity in a vehicle, DPW covers the positive equity. DPW locks in the vehicle’s value of waiver purchase to give borrowers the MSRP/retail value less the outstanding loan balance at time of total loss. DPW gives an immediate payout (versus a credit applied to a future loan), providing borrowers with greater flexibility when it comes to financing a new vehicle.
The loan officer doesn’t even have to determine when GAP or DPW benefit a specific borrower. The MSRP/retail value and loan amount are inputted to a quoting system that outputs the recommended coverage for the borrower based on their LTV.
The Cost of Driving
It’s getting more expensive to own and maintain a vehicle. Plus, total loss claims are rising, creating more financial friction for borrowers and portfolio risk for lenders. When a vehicle receives a total loss valuation the average payout for DPW claim is $5,500. Compare that to the average $1,600 GAP claim and your borrower’s have more funds to roll into their replacement vehicle. Opposed to GAP, DPW has unique targeted uses and benefits.
Three Use Case Scenarios for Depreciation Protection:
- A borrower places a down payment or trades in a car: When a borrower signs on the dotted line and brings a down payment or a vehicle to trade in, they have instant equity. Typically these borrowers are in the A or B tier and tend to be more financially savvy. These borrowers want to guard their upfront equity, and that’s what DPW does. It protects this equity as well as payments made towards the loan.
- GAP doesn’t benefit borrowers: UDAAP stresses the importance of vehicle protection products that truly benefit the borrower. While GAP has beneficial coverage for most high LTV loans, it isn’t always applicable to every loan. Depreciation protection can be sold when GAP isn’t the best fit for a borrower’s specific situation.
- Boosting the balance sheet: With a sluggish yield curve, credit unions, banks, and dealers alike are looking to generate additional non-interest income. DPW is another vehicle protection product to add to your lineup to boost revenue with non interest income. The majority of credit unions that offer DPW see a 20-30% increase of non-interest income.
The Heated Seat Experience
Founder and CEO of Depreciation Protection, Brian Allietta, says, “If you live in a climate that calls for heated seats, once you experience them you won’t want to live without them. DPW is the same.”
The regulatory and economic climate calls for DPW. Allied Solutions and Depreciation Protection predict that the market will continue to see an uptick in the volume of vehicles deemed total loss and states will continue to restrict the requirements for the sale of GAP. With these predictions in mind, leverage an alternate solution to help your borrowers maintain positive equity and keep them protected in a total loss situation.
Depreciation Protection is a Champion partner with Allied Solutions
About Depreciation Protection
Depreciation Protection, Inc. was formed with the goal of bringing a new and innovative consumer protection product to the consumer who has never been served in the past. With over 55 years of experience in the financial institution market, we realized the need for a product that is geared towards protecting the equity in the vehicle, compared to the traditional products that were designed to protect the negative equity (i.e. GAP). Fueled by our distribution partnership with Allied Solutions, LLC and the financial strength of the carrier, Securian Financial Group, DPW is well positioned and ready for the future. DPW is currently sold at 400 Financial Institutions across the United States and growing fast.