Take your Guaranteed Asset Protection to New Levels
Guaranteed Asset Protection (GAP) is simple!
It’s great at generating non-interest income and protecting your loan portfolio (along with your members).
Yet keeping it all “above water” may not be as easy as you think.
We put together 5 recommendations to ensure your program remains surprise-free.
1. Be safe: Choose 150% LTV
How many of your auto loans have an LTV over 100%? None? I wouldn’t bet on it, and neither should you. Why?
Most lenders assume used car purchases are rated NADA “Clean Retail”. However, NADA estimated that more than half of those vehicles are actually “Average” or worse (that’s “Rough”). Here’s what that means in valuation:
Say your institution financed $11,000. A month later the vehicle was totalled (everyone’s ok), and the insurance company assumed average retail of $8950. Then they deducted 10% for depreciation, making a total claim payment of $8,055. That leaves a balance due of almost $3,000.
Your lending was responsible, with a starting LTV of 91%. However, at claim time, it had ballooned to 137%! If your GAP program had a standard 125% LTV cap, your borrower would be out around 12%, or $360.
The borrower is already in a tough situation. They lost equity in the vehicle, they lost time dealing with it all, and on top of that they’re getting a bill. For payment towards a loan on a car they no longer have!
Needless to say, they’re not going to be happy.
What can this scenario teach you about your portfolio? To start, that there’s a good chance many of your loans are underwater right now!
There are steps your institution can take to mitigate.
The first, and most important, is to ensure your GAP LTV limit is well above 125%.
Rising GAP claims, inflated LTVs, even increasing depreciation rates can have negative effects on your auto loan portfolio. Keep it above water with our Auto Loan Portfolio Risk White Paper.
2. Sell the story: Website
The writing is on the wall. Or, should I say, on the tablet, phone, and watch.
Consumers want convenience, and a growing number want to get all their banking done without ever stepping foot in a branch. Or even speaking with a service representative.
It’s about time.
Yesterday’s borrowers scheduled appointments to come in with their significant other and “close” on their auto loan. How many do this today? And in a year from now?
You can save borrower’s time and make the process simple. Approval happens while they’re on the website or in the app. Document signing happens digitally. Funding the loan and submitting to the dealer is a remote process. Easy for all parties.
What a great borrower experience. Or is it? Consider:
- What about GAP and your other protection products?
- Did your borrower educate themselves about ancillary protection options, and which make the most sense for their situation?
- How your institution will continue to manage risk and generate non-interest income?
Oh, well. Guess we’ll just go back to in-person loan closings. Or…
Integrate your protection products within the digital process!
This isn’t a single field asking: “Do you want GAP or Warranty?” Instead:
- Develop engaging stories (embrace video!) that can relate to most borrowers.
- Include testimonials and reviews.
- Calculate the costs in a flexible manner (including possible extension of term options).
- Display potential losses is an honest and transparent manner (ie. the GAP at 12 months or average cost of a new A/C compressor)
- Send your borrower a personal video e-mail which gives them an overview of choices and why they might (or might not) want each.
How would your staff handle the conversation in person? It’s really about offering that type of human approach while using the available technologies.
Providing quality content within the process will help your borrower make an informed decision based on any necessary information. All while maximizing your non-interest income opportunities.
3. Staff Training
Some customers and members will continue making use of branches. That’s why some of the big banks are making branch cafes, where applying for a loan is as simple as ordering a latte.
And the conversation must be as relaxed as the coffee order. Ok, maybe not this coffee order. You’re just having a chat about some money things.
Baristas or not, your branches depend on your FSRs. Their relaxed approach to helping potential borrowers ensures a smooth customer experience. With strong knowledge of your offerings, they can recommend solutions which make sense for the customer and institution.
Your job? Watch GAP sales grow.
And one more thing. Ensure your FSRs have the best training.
It’s about understanding the real benefits of your ancillary products. Then, explaining it to a borrower. Once they understand the potential risks of passing on something like GAP, they’re able to present it in an impassioned and honest manner.
You know GAP can mean the difference between a borrower keeping their job or even feeding the family. An FSR who has the training to grasp this idea will “sell” without ever needing to make a pitch. Ensuring their borrowers are protected will become a no-brainer.
Speak With Your Vendor
Regular training sessions are a great way to keep your FSRs on board and comfortable presenting options. Consistency is essential.
Ask your vendor to share who your best and worst performers are. Talk with staff who are performing below average to understand what challenges they may have. Ensure they receive every opportunity to grow and learn.
Some staff just aren’t suited to “selling”. Consider assigning them to a more appropriate position for their skill-set and personality.
An engaged staff can average GAP closing rates on eligible loans as high as 80%. This results in borrowers with lower financial risk, while managing your institution’s portfolio risk. It’s truly a win-win.
4. “Open Source” Menu Offering
Great, you’re on top of FSR training. They’re invested, educated, and ready to make the most out of your product lineup. Now, equip them with the best tools.
GAP and other protection products are best offered within a specialized Menu Selling System. All the major industry vendors have Menu offering platforms, most of which integrate with your Loan Origination System (LOS).
More steps means more complexity. Menu-selling platforms are the process, so your FSRs never need to switch to other websites or programs. Convenience wins!
Menu selling systems also help your borrower prioritize what’s important to them. Then, it generates appropriate protection combinations real-time. Your FSR can work with them on a budget, term, and protection package in the moment.
Ever worked with an independent insurance agent? Then you know the value of having your car insurance with one company and life insurance with another. In this case, choice is good.
Most providers require your institution to include all their products within the menu-selling system. Thus, restricting your choice of carriers or administrators. This means if you choose to replace one product, you may have to replace them all.
That seems inconvenient.
Some providers offer menu offering platforms which are “provider agnostic”. In simple terms, it means you can use whoever you’d prefer for each service. Seek them out. It’ll save a lot of headaches later, while ensuring you can provide the best possible option for your borrowers at any time.
5. Offer GAP Plus
GAP is designed to compensate your borrower for the difference between the insurance company proceeds and their loan balance after a total loss of their vehicle.
While it relieves the debt between the institution and your borrower, it does nothing to help their lost equity in the vehicle. In other words: Depreciation.
Remember that down payment on the vehicle? Imagine it being gone. Can your borrower still afford to replace that vehicle with a comparable one?
GAP Plus can help.
GAP Plus (where approved, check your state regs first) not only helps pay off the loan, but also provides major benefits for both the borrower and your institution:
- Borrower: $1000 or $2000 (depending on plan) towards a down payment on a replacement vehicle.
- Institution: Manages delinquency risk and ensures loyalty. Borrower must finance the replacement vehicle with your institution to qualify for benefits.
GAP Plus has an added cost, currently between $20-$50. Typically, this is passed on to your borrower.
Want more? Feel free to check out our other GAP resources:
- GAP: 5 Common Misconceptions Costing you Money
- GAP: 8 Key Considerations
- Managing Your Auto Loan Portfolio Risk White Paper
- Best GAP Providers in 2019
Feel it’s time to discuss your own institution? Perfect. Let’s schedule a short web meeting.
Blogger. Speaker. Part-time Jedi.
Focused on helping your bank or credit union grow in the face of emerging challenges.