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Consumer purchase behavior, economic cycles, and cyclical interest rates come and go, and there is very little that auto lenders can do to prevent or change these trends. Ultimately, the best way to protect your members and your institution from cyclical auto industry trends is to evolve with the times and find creative and valuable ways to provide vehicle protection, all while protecting your bottom line from shrinking margins.
There are two trends in vehicle ownership and loan habits, in particular, that we have been monitoring and identified as key trends that make vehicle protections products more important than ever.
Consumers are keeping their vehicles for longer periods of time
In 2006, according to CNBC, car owners traded in their vehicles after 4.3 years. By 2015, the average car ownership period jumped to 6.5 years. This pushes vehicle owners well beyond the 2015 average manufacturer’s warranty of four years and 50,000 miles, which means borrowers are more susceptible to costly vehicle repairs that inevitably occur the older a vehicle gets.
To protect these borrowers who choose to hold on to their vehicles well past the manufacturer warranty, lenders can adapt by offering extended auto warranty coverage to each and every borrower. Should the borrower find themselves in a position where they have to depend on the protection plan to cover necessary vehicle repairs that can easily climb into the high triple digits, you would be seen as the hero. Providing vehicle protection is one effective way to meet the changing needs of your borrowers. Furthermore, it does right by your borrowers, creates a competitive advantage, generates non-interest income, and protects you from deferred maintenance situations that can lead to overly-depreciated assets.
Consumers are taking on larger, longer auto loans
Low interest rates may be appealing on paper, but they’ve left some borrowers at a higher risk for deficiency balances than ever before. Longer, larger loans and higher vehicle purchase prices have led to substantially larger deficiency balances, creating dangerous situations for lenders and borrowers alike. According to Experian, the average vehicle loan in 2010 was $25,289 for 63 months. Thus far in 2016, the average price is $30,032 at 68 months. Based on those loan values and terms, in 2010 the maximum GAP exposure was $1,803 for ten months during the second year of vehicle ownership. Based on the average vehicle loan terms in 2016, borrowers are experiencing a maximum GAP exposure of $5,330 that lasts a whopping 30 months—from month 12 until month 42.*
What this means for lenders is that GAP coverage should not be looked at as an "optional product" because the risk of exposure is too high. By educating borrowers on the importance of GAP coverage and why their larger, low-interest rate loans include higher risk, your financial institution is providing valuable investment advice and protecting its own assets against costly deficiency balance situations.
Borrowers are becoming increasingly savvy, and low interest rates are no longer enough to keep existing borrowers on the books and win new business. With borrower habits leading to higher-risk loans and vehicle ownership, vehicle protection products are more essential than ever.
*The GAP exposure rates for 2010 and 2016 were created using our proprietary quoting and sales platform, Unity.
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