Avoiding the Negative Equity Spiral in Auto Lending

Sponsored by SWBC

Almost a third of American adults have a car payment, and, on average, 32 percent percent of vehicle trade-ins are “upside-down” in their vehicle, meaning they owe more than the vehicle is worth. Carrying negative equity on a vehicle has become more and more common as Americans have become accustomed to upgrading to the newest, most technologically advanced options on the market. The negative equity that your members are carrying with their vehicle loan can become a ticking time bomb if the risk to both the borrower and the lender isn’t properly mitigated. How can your institution help borrowers address this risk responsibly?

Keeping Up With the Times

For a consumer, guaranteed asset protection coverage should be a no-brainer, and many car buyers now know to ask for GAP when making a vehicle purchase. When GAP first hit the market, this definitely wasn’t the case, but auto lending was a different game back then. In the 1970s, the average LTV for a new vehicle purchase was about 87 percent. Now, depending on one’s credit-worthiness, LTV on auto loans range typically range between 97 and 113 percent. Vehicles are more expensive, and borrowers are more likely to owe more from day one of their purchase. Add to the equation the fact that new cars depreciate on average 11 percent the minute they drive off the lot, and you have a scenario where vehicle debt can burden the borrower for years, and an accident or theft could leave the borrower overwhelmed. But just as vehicle and buying trends have evolved over the years, so have traditional vehicle protection programs like GAP. GAP with PowerBuy™ is the newest evolution when it comes to protecting the borrower, providing coverage for both the balance of the vehicle loan as well as the depreciation of the vehicle in case of total loss. 

There for the Long Haul

When a borrower experiences a total loss, GAP can be a lifesaver. The primary insurance carrier pays out the current value of the vehicle, and GAP steps in and pays off any remaining balance on the vehicle loan. But the borrower probably needs a replacement vehicle to get their life back to normal. Here’s where GAP with PowerBuy can really save the day: A borrower who has GAP with PowerBuy will receive a benefit that is equal to the greater of the GAP or depreciation of the vehicle from the original purchase price. If their depreciation is greater than their GAP, their vehicle loan will be paid off and they will receive the remaining benefit as funds toward a down payment for a replacement vehicle, effectively making the borrower whole on their investment.

What happens when the unexpected occurs?

Ask most Americans what would happen if they totaled their vehicle, and a majority of them would probably answer that their primary insurance carrier would pay for the damage to their car. Some may answer that insurance would cover most of the bill, and if totaled, GAP would make them whole on their loan. Few would have any idea how they would come up with a down payment for a new vehicle, should they experience a total loss. Previously, the only option would have been to start over from nothing, but by providing a means to protect their investment with GAP and PowerBuy, your credit union can help protect your members against the negative equity spiral and set them on stronger financial footing for the future.

To learn more about improving the success of your auto lending program, click here to download our free ebook, 2018 State of Auto Lending.

Headquartered in San Antonio, SWBC is a diversified financial services company that provides a wide range of insurance, mortgage, and investment services to financial institutions, businesses, and individuals. With offices across the country, SWBC is committed to providing quality products, outstanding service, and customized solutions in all 50 states.