What is Depreciation Protection? A Review.
The “everyone can understand” version: Depreciation Protection covers part or all of the loss in value of your car from depreciation in the event of it getting totaled.
Here’s the more detailed and “jargon-y” description: Depreciation Protection is an insurance-backed product protecting both the lender and borrower from the financial risk of a total vehicle loss. It covers the “gap” where GAP coverage may not make sense, especially on loans with down payments exceeding 20%.
Depreciation Protection emerged over 20 years ago. Car dealers sold it as “Down Payment” protection. At the time, depreciation rates were much lower, so the need was not great. Thus, the program faded into history. Today is a different story. Depreciation hits hard, and the coverage is making a comeback.
How It’s Known
GAP is GAP is GAP. No matter where you go, it’s called the same thing. Depreciation Protection is like Vehicle Service Contracts, where the same thing can go by a few different terms. Here are the terms we know:
- Depreciation Protection
- Down Payment Protection
- Replacement Coverage
For consistency, we’ll use Depreciation Protection throughout this article and in other posts.
First year depreciation is nearly 30% on some vehicles. You lose 10% just for driving off the dealer lot. That’s a whole lot of risk. Combined with lower insurance settlements, a total loss only a few years into the loan term means saying goodbye to part or all of the down payment. That’s even with GAP coverage on the loan balance.
Even if no loss occurs, this period is one of negative equity for the borrower and an “underwater” vehicle loan for your institution.
Revenue Generation, A New Opportunity
Depreciation Protection is a lower tier of portfolio risk than GAP. However, it can drive, and almost guarantee, replacement loans, along with non-interest income; providing valuable protection for borrowers while generating revenues for your institution? Sounds good!
Our company, GreenProfit Solutions, offers Depreciation Protection through a major provider. It might be a fit for your institution. It also might not. This article will help you understand the range of features, pricing, and even philosophy available across the market. Depreciation Protection isn’t just one thing. So use this to ensure whichever program you choose is the best for your institution and borrowers.
Depreciation Protection Program Checklist
- Bundled or Standalone
- Insurance, Debt Cancellation, or Membership
- Need and Institution Philosophy
- Refundable or Non-refundable?
- Compliance, Regulatory, CFPB
- Offering Platform
- Other Benefits
1. Bundled or Standalone (aka. Offering Modes)
Here’s your first choice. It’s ok, we’re going to explain what each means, and then provide some questions for you to help make a decision. There are three top industry providers of Depreciation Protection. Each is built differently:
- Company A: Their main product is an optional offering with blanket pricing available. This is separate from your GAP and other protection products. As a result, it has its own markup.
- Company B: Same as Company A, however, it is only available when bundled with GAP.
- Company C: This is also an optional offering. It provides elements of GAP and Depreciation Protection under one waiver agreement.
- Determine if you actually have a need for Depreciation Protection! Do you finance new vehicles? That’s where it will have the most impact.
- Decide if you want to replace your current GAP. It’s required with one of the providers.
2. Insurance, Debt Cancellation, or Membership
What’s the difference? To the borrower, none. To you? Well, none are even considered insurance! Meaning, your institution doesn’t need to hold a Property/Casualty Insurance license in order to sell this product. Of course, all are backed by a well-rated insurance carrier.
Both Company A and Company B offerings are “Membership” plans (Company B’s GAP plan is a debt cancellation format). These are offered to a specific “class” of members/customers, similar to Auto Deductible Reimbursement (ADR) offerings.
Company C’s program is a debt cancellation, similar to your GAP, wherein your institution issues a waiver. Claims are backed by a policy of contractual liability (CLIP) with an insurer.
- Which form your chosen provider uses is unimportant, so long as it is approved for sale in your state (and those in which you operate).
All of the programs include:
- Open enrollment
- 20 year vehicle age limit
- 0 mileage limit
- Technology platform
Here’s how the basic benefits compare:
- Based on your portfolio, decide if “life of loan” or “stated period” term makes more sense.
- Evaluate which is more beneficial to your borrowers:
- Benefits of NADA at enrollment, less NADA at Date of Loss (DOL)
- NADA at enrollment, less loan balance at DOL
- Is the Loyalty requirement important to you? (This means the benefit is paid ONLY after borrower finances their replacement vehicle with your institution.)
4. Need & Institution Philosophy
Does your institution sell products to borrowers even if there may not be a need? Or is a personalized package built at every loan closing? Serious question. We find staff training has a role here. Making the offerings simple for both loan officer and borrower, some institutions offer the full package by default. This helps keep non-interest income up and complexity down.
If your institution has robust training and a philosophy of “only provide what makes sense”, a pre-bundled product might be a “spiritual” clash.
- On occasion, a borrower has need for one product (GAP and/or Depreciation Protection) but not the other. If your institution aims to provide the most for your borrowers’ money, the bundled plan may not be the best fit.
5. Refundable or Non-Refundable
Early termination: Do you refund the borrower or not? There are two paths, decided by your institution’s philosophy and state regulations.
Refundable plans use a prorated formula (with an optional cancellation fee) to determine the borrower’s refund. Your institution will also be liable for refunding a portion of your mark-up. However, the pro-rata refund serves as collateral, and can be collected in the event of a repossession.
A non-refundable plan guarantees your institution retains the full original income, cancelation or not. There is no refund made to the borrower. One consideration: in the event of a repo, there is also no refund to the lender.
- If your state allows for both, we recommend the non-refundable plan to generate the most revenue with the least amount of work for your institution.
- Your philosophy and relationship with your borrowers may lead you to a different conclusion. We just want to ensure you’re fully-informed.
6. Compliance & Regulatory Considerations
It’s a fine line. Staying within regulatory, ethical, and financial guidelines means something different for every institution. However, at minimum, that “line” must agree with the position of the CFPB. What they say goes. And it could also cost you.
Santander Bank saw large fines assessed against them. Why? Because they told borrowers “any and all” GAP deficiencies would be waived in the event of a total loss. You, as a savvy lending expert, know that isn’t entirely true.
- If using a waiver, make sure it is carefully and clearly worded. Ensuring borrower understanding helps avoid negative attention from regulators.
- Not all forms of Depreciation Protection have the same state approvals. Check with any potential provider (and possibly your in-house compliance officer) to ensure smooth sailing in all your places of operation.
7. Offering Platform
In a previous post, we spoke about the value of integrating loan add-ons into your lending platform. Whether you’re offering GAP, a vehicle service contract, or other ancillary protection, selling is easier when it’s all together, while increasing sales penetration. Also, the borrower can see everything available to them, and your loan officer can explain which make the most sense.
Depreciation Protection is one of these add-ons.
Each of the three providers include a full technology platform. However, two ask that you switch your other programs to their platform. If you’re happy with your GAP provider, for example, this may not be an acceptable tradeoff.
Company A – “Agnostic” – Mix and match providers on one platform. Sharing is caring!
Company B – All products typically provided by them.
Company C – Same as Company B
Menu-selling is strongly recommended. It ensures easy product explanations and a simple sales process. The loan service representative needs only share a “menu” of available loan options, including all ancillary services, with the borrower. Depreciation Protection included.
The monthly payment changes real-time as services are added/removed/edited. Combine menu-selling with a product-agnostic platform and you can offer all of your services on a single screen, no matter which company provides them.
- Find out if the Depreciation Protection provider has seamless integration with your LOS
- Ask for a live demo & embrace providers which have a “menu-selling” system to simplify product offering
- If choice is important and/or you are happy with your current providers, consider an “agnostic” platform
8. Other Benefits
Depreciation Protection is at its greatest appeal in the case of a total loss. Of course, not all your borrowers will be in this situation. Which is actually good news. But then what do they get from having the product?
Actually, more than nothing.
Two of the three major providers (Companies A & B, if you’re keeping track) offer ON CALL. This is a service that provides travel assistance, concierge service, and medical assistance. No need to total your car!
Company C provides a $1,000 Accidental Death benefit. Let’s just say, we hope your borrower never has to use any of this service.
- These benefits add value to the core product and widen its appeal beyond a single scenario. Be sure to include them in your evaluations.
Apples, oranges, and oranapples. Is that a thing? I’m going with yes. Due to the differences between each program, the prices will not be the same.
Perhaps you already know which type of program is the best fit for your institution. Great! Let’s do a quick exercise of working backwards to make sure we’re all taking everything into account. Start here:
What is the typical pricing and penetration of other services? Do they achieve your internal goals? Are borrowers satisfied? Pricing for Depreciation Protection is dependent on a range of options and variables. Net costs typically run between $60 and $700. (Remember, one of them bundles with GAP)
Company A is a stand-alone product. It includes…Depreciation Protection. That’s it.
Company B is a bundled offering. GAP and Depreciation Protection come as an inseparable package. Considering needs for one can mean less risk on the other, we find this odd.
Company C has a more complex product. Depending on the claim, it may include a GAP supplement along with comprehensive Depreciation Protection. For complete coverage, a separate GAP product will still be necessary.
Some auto insurance carriers provide a similar coverage. At the time of publishing, car dealers are not offering this product. However, with depreciation rates rising, the need growing, and the profit potential made apparent, they may jump into the game soon.
- Consider payment elasticity: If your institution uses an average mark-up of $200-$250, which company’s plan would be most affordable to your borrowers?
- Flexibility: What is the greatest risk to your borrowers?
- Non-interest income: Which provider gives you the “best of” for both borrowers and your institution?
Before Driving Off…
Remember that 10% value you lose right off the lot! Ok, last car pun…for now.
There’s always more to learn. About just so many service offerings, emerging challenges, trends, and more. We’re here to share the knowledge and make your life easier. Let’s start with getting a deeper understanding of Depreciation Protection. Here’s a few to get you started:
Best Financial Institution Depreciation Protection Providers – Available 2/15
What is Depreciation Protection? (Definition, Benefits & Getting Started) – Coming soon!
*Plan benefits and rates provided by various sources. We take no responsibility for their accuracy. They are provided to assist you in your learning and evaluation. For the latest benefits and rates, please contact the companies directly, found in our post, Best Financial Institution Depreciation Protection Providers.
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