Guaranteed Asset Protection: Checklist for Success
Let’s start with a review.
You’re a financial industry guru. We could toss out every bit of jargon, a slew of acronyms, and you would be ready. I’m certain of it. However, let’s assume some new faces are here as well. Maybe some of this is unfamiliar to them, just like it was for you so long ago. (I’m not calling you old! You’re a seasoned veteran.)
GAP (Guaranteed Asset Protection) is an insurance-backed product designed to protect both the lender and borrower from the financial risk of a total vehicle loss. It was developed after lenders noted insurance company “total” payoffs did not cover the full outstanding loan.
With increasing finance terms and interest rates, borrowers could easily find themselves owing more on a vehicle that it was actually worth.
If totaled, it may not get enough from primary insurance to cover the loan balance. That means owing money on a car that’s no longer theirs! Needless to say, this scenario was a common hardship for borrowers. It also led to increased write-offs for lenders.
Revenue Generation. A Happy Side-Benefit.
As the product developed, lenders found that alongside addressing the necessary risk-management, GAP could be a vehicle (pun intended) for non-interest revenue growth.
Changes To Consider
GAP, and the climate it addresses, evolves continuously. A number of industry-wide shifts led to major effects on auto lending. These can affect how a GAP program provides benefits (and even if it covers the entire gap!), including:
- Increased depreciation
- Lower primary insurance settlements
- Increased percentage of “total” claims (car tech costs a contributor)
- Natural disasters
- Focus on the borrower’s experience
What does this mean to you? Simply put, there’s a lot more to consider when choosing a new provider or even just performing due diligence on an existing GAP program.
Our company, GreenProfit Solutions, offers GAP programs through a major provider. However, we realize that our solution may not be a fit for every institution. The goal here is to provide guidance so you can ensure whichever GAP program you choose is perfectly suited to your institution and borrowers.
GAP Program Checklist
- What is Loan To Value (LTV) Limit?
- Does it Include Skip-a-Pay? How many?
- Does it include Delinquent Payments? How many?
- Does it include Other Debt?
- Have GAP Plus? (Not available in all states)
- Refundable or Non-refundable?
- Offering Platform?
1. LTV Limit
When GAP problems arise, this is where they start. Let’s assume you have the common 125% LTV limit. That means any claims where the loan to value ratio is under 125% will be paid in full. Since your loan policy is likely 100% LTV, all’s good. Right?
Unfortunately, it’s easy to go over the 125% limit. How? Lower insurance payouts, depreciation, and other challenges mentioned above may push claims above 125%. And if it does, the claim is “shorted” by the amount of overage. That’s money due. Not a place your borrower (or your institution) wants to be.
- Ensure your GAP provider offers higher LTV limits
- Review your NADA or KBB valuation process
- Consider other services such as Moroney Labels for more exact (VIN-based) valuation
Payment flexibility for borrowers is a smart strategy for financial institutions. While this simply extends the payment loan term and may include a fee, it can be a form of temporary relief for your borrower. GAP programs typically cover the deficiency of one skipped payment. Check with your provider for the exact details.
Skip-a-pay is a valuable marketing tool, especially around holidays and other major spending times. Your GAP provider may offer additional skip-a-pay allowances for an additional fee.
Looking from a claim and marketing perspective, decide if additional (or any) skip-a-pays make sense. Check borrower demographics to estimate usage patterns and appeal.
3. Delinquent Payments
Borrowers with late or delinquent payments still receive GAP coverage. However, much like Skip-a-pay, if the vehicle is totaled before payments are current, GAP will deduct for the missed payments. If your GAP program has a Delinquent Payment allowance, it can waive that deficiency.
A borrower who goes delinquent on their payments likely cannot pay an outstanding balance on a claim. To accommodate borrowers in a tough financial situation, ask your provider if they offer additional delinquent payment coverage.
4. Other Debt
Before the Great Recession, this feature was extremely popular. It was also common to have LTVs well above 100%. Remember that? Today, Other Debt can be a useful tool in helping borrowers consolidate their debt, while building loan volume for your institution.
We see Other Debt used when a borrower’s loan is “upside down” or “underwater”. This occurs when the loan balance is higher than the value of the vehicle. The difference is rolled into the new loan, putting the borrower in a better financial position. Of course, the combined balance must still be in compliance with your max LTV.
Other Debt coverage includes both the existing balance and the new car loan. In the event of a claim, the combined balance is paid.
If borrowers are dealing with a range of debts, and loan growth is an institution goal, Other Debt coverage can be another arrow in your quiver.
5. GAP Plus (Not available in all states)
This is an optional “loyalty” coverage available in some states. Here’s how it works:
After a normal GAP settlement, your borrower also receives additional funds (the amount you set with your provider, usually $1000, but can be higher). This extra amount serves as a marketing incentive. They use it as a credit towards the down payment on a replacement vehicle…only if they finance with your institution.
Ask your provider if this benefit is available in your state. When combined with your training/marketing on the value of GAP, consider if it is worth the cost. Just make sure you are clear on any steps the borrower must take to get the credit.
6. Refundable or Non-Refundable
Early termination refunds are handled in two ways, depending on the state where you do business.
A refundable plan will use a pro-rated formula (with an optional cancellation fee) to determine the borrower’s refund. Assuming your GAP includes a mark-up, your institution will also be liable for a portion of this refund.
A non-refundable plan guarantees if a plan is terminated, your institution retains the full original income. There is no refund made to the borrower.
If your state allows for either, it would make sense to opt for the non-refundable plan to generate the most revenue and least amount of work for your institution.
7. Offering Platform
GAP programs find success when the staff and systems offering are seamless for the borrower (and institution).
Here’s a convoluted, yet common, process:
GAP presented to a borrower (in-person, over the phone, or online). To get more information or sign up, a new website must be loaded, leaving the LOS.
This puts a snag in the loan closing. Now there’s added time, effort, and complexity. What does that do for your sales penetration of ancillary products? Payment protection, VSC, and GAP all suffer. Of course, the borrowers may suffer later if they end up in a situation where one of those may have helped.
To address this challenge, most GAP providers include a full technology platform. Seems good, except, they generally require their firm is the source for all offered products. You know better than anyone that one company may, or may not, be the best fit for every product.
There’s product-agnostic alternatives. Ask your GAP provider, or look at the feature-sets of others to find which makes the most sense for your goals.
The final point is on menu-selling, which is exactly what it sounds like. The loan manager presents the borrower with a “menu” of available loan options, including all ancillary services. You can easily see the monthly payment as each is changed or added/removed. Combined with a product-agnostic platform, you can offer all of your services on a single screen. And you can do this no matter what company provides them!
- Find out if your GAP platform has seamless integration with your LOS
- Embrace providers which have a “menu-selling” system to simplify product offering
- Consider an “agnostic” platform, giving your institution flexibility in using products from several companies
By now, it should be clear why we placed this category last. Your GAP program’s success and satisfaction is determined by many more factors than the initial cost. We discussed a number of them in this article. You may discover more in your due diligence.
Also, the cost of GAP is going up, no matter your provider. Claims are on the rise, due to the causes at the top and other societal factors (we’d be happy to discuss, but they’re not important for the goals here). The insurance carriers charge more, meaning, your institution will pay more. This trend is likely to continue for the foreseeable future, while the value of GAP for both institution and borrower remains constant.
We understand you want the lowest prices. Keep in mind that the lowest dollar amount here may not mean the cheapest or most profitable for your institution. Components which increase the cost while raising its appeal can pay for themselves. Features like delinquent payment coverage can save your institution money on claims, while also assisting your borrower’s financial situation.
There’s also a trend we see within the industry where providers offer up-front payments in exchange for longer contract terms. Take a careful look at these plans to ensure they are truly in the best interest of your borrowers and institution, now and into the future.
Expanding Your Knowledge
There’s always more to learn. We’re here to share the knowledge. Read a selection of our other articles on GAP:
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