You’re all about protecting members. Whether it’s through ensuring they have a low-rate and forgiving credit card or a secure savings account, their success is your goal. Just like you help them towards financial empowerment, loan protection is another important strategy.
In this article, we will identify and explain the crucial similarities and differences between GAP and Depreciation Coverage. With this information, you can ensure every auto loan borrower has the right options presented to them. And you’ll never offer anything they don’t need.
Of course, you can also use the insights below to help grow member engagement and loyalty.
If you think you know everything about GAP and Depreciation Coverage, take a look at our 5 Steps to Protecting Members: GAP & Depreciation Coverage article. But this one is short, so keep it open for a quick primer.
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Why offer GAP and/or Depreciation Products?
First, let’s understand the basic idea behind these products. You know, so feel free to say them with us:
- Protect your borrowers from the costs following totalled vehicle claims
- Protect your credit union from delinquencies
- Generate a source of non-interest income for your credit union
Some important and beneficial features! Seems worth discussing for almost every vehicle you finance, right? On its own, wouldn’t that be enough to get your staff excited about offering GAP and Depreciation Coverage to every borrower?
You also know the answer to this one: Maybe.
“100%, 100%, …100%” Is More Than Just a Training Line
If your credit union ever worked with trainers, you’ve heard the phrase, “offer 100% of your members, 100% of your products, 100% of the time.” They’re right. Follow the advice. It keeps the process top-of-mind with your team, and is a great start.
However, offering is more than just saying a thing exists. You recognize the need to personalize for the unique risks of each borrower. Just like your data journey helps you make better decisions, so too can your offering process.
Skip it and you run the risk of selling unnecessary products to some borrowers and helping bypass important ones with others.
Beyond not truly serving your borrowers, it opens the door to potential UDAAP compliance issues. No one here wants either of these outcomes.
So beyond 100%, 100%, and 100%, let’s add one more: “With 100% relevancy.”
GAP and Depreciation Coverage: What’s the difference?
Both GAP and Depreciation Coverage help address the risk of being out lots of money in the event of a total loss vehicle claim. This can be due to a few reasons:
- The vehicle’s valuation decreases faster than the loan is amortizing
- The insurance carrier pays out an amount which leaves an outstanding balance
- Insurance payout does not make up for loss from down payments or equity in the vehicle
They’re similar, yet serve different purposes. While both offset the risk created by depreciation, how and whom they benefit are what sets them apart.
Risk: Borrower & institution
Claim benefits are paid to your institution. If the insurance settlement is insufficient to pay off the outstanding balance, the liability falls to your borrower. If your borrower is unable to pay off this debt, your institution may have to assume the loss, unless you’ve got GAP to help!
For an in-depth look, browse our category of GAP article content.
We thought GAP was simple. Then we dove deeper. Turns out, there’s a lot more to know. Good thing we put it into a 5-step Cheat Sheet! Download now!
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Unlike GAP, there’s nothing at risk for your institution. Depreciation coverage credits are generally applied to a new loan to help offset your borrower’s loss of equity (often from a down payment), letting them purchase a similarly-valued vehicle.
In a sense, it’s a loyalty benefit, since they have to finance with your institution again to get anything back.
In summary, GAP helps make both parties “whole”. Depreciation Coverage helps make the borrower “whole”.
Rushed for time? Bookmark this page and get fast insights now! Download our Depreciation Coverage Cheat Sheet. Get 5 quick tips that you can act upon immediately!
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Identifying Borrower Risk
How can you identify which borrowers need either (or both) protection products? Let’s figure it out together.
Most Protection Providers have platforms which let you enter a down payment and loan data, then see a graphical result. It helps illustrate:
- If there is a GAP (projected outstanding balance)
- When it starts and how long it lasts
- The range of the GAP (how large the possible risk may be)
Sidenote: Make sure your system creates a personalized chart, not just a sample image, for every borrower.
Beyond the guidance of your offering platform, a good rule of thumb is if the down payment is 20% or less, there will be an outstanding uncovered balance during some portion of the loan. The lower the down payment, the risk of a potential loss grows higher and lasts longer.
GAP helps cover an outstanding balance. Depreciation Coverage is a plan which credits back on a new loan. The borrower can choose plans with differing amounts. Depending on your institution arrangement, the credits range from $2,000 to as high as $10,000.
What qualifies a need for Depreciation Coverage? Most borrowers. Ok, we’ll be more specific.
Unlike GAP, which, barring an outstanding balance, pays no benefit, everyone can gain from Depreciation Coverage. Why, if the loan is already paid off?
Think about financing a vehicle. There’s the loan, sure. What else? Right, the down payment, where most people put 20% or less. If you just got out of a loan, where’s the cash for it? Trapped in lost equity on that last vehicle. Here’s where Depreciation Coverage can help.
You want to ensure people opening a new loan can get a replacement vehicle of similar quality to the one that was totalled. It’s not just the right thing to do; it’s good for everyone. A newer or more reliable vehicle benefits both member and lender.
No GAP? Still Depreciation!
Depreciation Coverage is also perfect for borrowers with no need for GAP. Say there’s no projected outstanding loan balance at any point. Great, your institution will always be fine. But they’ll still lose any upfront equity in the vehicle.
Thus, while it’s important to offer everyone everything, it’s also important to understand when there may not be a need for certain products, especially GAP. Which brings us to an important sidenote:
Words of Caution in a Colorful Box
Some GAP and Depreciation providers bundle these two benefits into one policy. They’ll explain it to you as making the offering simpler. Sounds great, just be aware: While it’s right for most borrowers, it is not the right solution for all borrowers.
In fact, it’s not even the ethical solution for them. Going back to our earlier concern, you will be selling an unnecessary product to borrowers. Thus, should you really be making them pay for something they don’t need?
We believe this could be a lawsuit waiting to happen. The main aspect protecting your institution? That there aren’t many borrowers putting more than 20% down, so the number of plaintiffs might not be worth pursuing a case.
But is that a good reason to keep doing something?
More On Both Protections
You know how much we love GAP. There’s a whole category dedicated to it here on our Learning Library. We work closely with Frost Financial Services, a provider serving nearly 1000 institutions using their industry-leading VisualGAP platform.
And we’re also big fans of Depreciation Coverage. It, too, earns a category on the Learning Library. This one has a larger education challenge, as it’s a newer product with less penetration. However, we believe it’s essential to help people recoup that lost equity.
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We’d also suggest a short conversation with our team to ensure your GAP risk is properly managed. Even large institutions have been caught off-guard.
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