State of the Auto Industry - GAP Trends

By Jay Isaacson, Vice President of Commercial UnderwritingClick to download infographic (Opens in a new window)

Guaranteed Asset Protection (GAP) provides valuable protection for credit union members by allowing them to cancel the difference between an insurance settlement and their loan balance if their vehicle is stolen or totaled in an accident.

However, a “perfect storm” of economic factors and auto trends has converged, increasing the number of total loss declarations filed and pushing GAP claims to record highs.

Some of the factors contributing to this unprecedented rise in GAP claims include:

Extended loan terms: In Q1 of 2017, lenders reported record-high averages on auto loan terms: almost 69 months for new cars and 64 months for used cars1. Longer terms make payments more affordable, but they also extend the length of time borrowers must pay, leading to many owing more than their vehicle is worth.

Higher loan amounts: With the loan-to-value ratio on the rise, many borrowers find themselves under water, longer on their loans (sometimes even for as long as they own their vehicles). In fact, in the first three quarters of 2016, a third of car buyers were still making payments on their trade-ins, with an average of $4,800 in negative equity2. Typically, lenders will add this balance to the next loan, which widens the gap between the loan principal and the value of the vehicle securing the loan.

Faster depreciation: Vehicle values have depreciated more quickly in recent years3, extending the length of time during which a borrower owes more than their car is worth. Even slight depreciation can have a big impact on GAP.

Higher repair costs: Today, cars are built to last and keep us safe. But these advances come with a price. Higher-cost features, safety mechanisms, and modular components cost thousands of dollars to repair. Minor fender-benders are a thing of the past; the likelihood that a damaged car will be considered “totaled” has risen, which in turn increases the frequency of GAP claims4.

More cars on the road and more collisions: Lower unemployment and rising consumer confidence have led consumers to purchase more vehicles. Additionally, reasonable gas prices have encouraged car owners to drive more. Unfortunately, increased traffic means more collisions, especially with drivers distracted by their smartphones and dashboard screens.

This “perfect storm” of trends is impacting GAP providers across the industry. Given the steep rise in costs, it is more important than ever for credit unions to work closely with their GAP providers to maintain their competitive advantage, while helping members protect their sizable investment whenever they head out on the road.

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GAP’s Perfect Storm
GAP’s Perfect Storm

A combination of trends has pushed Guaranteed Asset Protection (GAP) claims to record highs across the industry.

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1 Experian,  State of the Automotive Finance Market(Opens in a new window), Q1, 2017. 2 Edmunds,  More Car Shoppers Are Underwater on Their Trade-Ins Than Ever Before(Opens in a new window), November, 14, 2016. 3 Black Book Vehicle Depreciation Report(Opens in a new window), February, 2017. 4 CCC information Services, Inc., What’s Driving Total Loss Frequency?(Opens in a new window), November, 13, 2015.