3 Factors Impacting GAP in 2019
Produced by Anne Holtzman, Senior Vice President of Claims and Recovery | April 10, 2019
Rising costs, depreciation values, and total loss claims are disrupting the way the auto market is doing business as dealers, lenders, and consumers grapple with how to best handle the strain on finances and resources. GAP is one ancillary product that is being impacted by the economic factors and continuing to cause concern for lenders and consumers in 2019.
Many consumers assume that their insurance policy is enough to cover the remaining balance on their loan if their car is ever totaled or stolen. Unfortunately, that is not always the case as the actual cost value (ACV) of the car decreases over time. GAP (short for Guaranteed Asset Protection) is a popular add-on for car buyers that, according to the Consumer Finance Protection Bureau, is an optional product meant to help cover the amount, or ‘gap’ between what insurance will pay for a totaled car and the remaining balance on the loan.1
This is a helpful option for buyers, because it’s a tough situation for lenders and consumers alike if the car becomes damaged or totaled, but the insurance pay out does not fully cover the outstanding balance owed on the vehicle. This is known as an ‘upside down’ loan. According to Edmunds, there’s millions of upside-down trade-ins that happen annually, which can lead to a strain on finances for both the consumer and lender in the event of a total loss.2 This strain, particularly on GAP claims, is emerging from various market conditions, with three main factors to consider.
1. Ongoing Economic Change
The average loan amount jumped approximately 4.5% between 2017 and 2018, reaching nearly $32,000 for new, and used cars seeing a similar change topping $20,000, according to Experian’s 2018 Q4 State of the Automotive Finance Market report.3 Cost-conscious consumers are focused on keeping monthly payments low, and are extending their loan terms to 6 or 7 years as a result. As these new and used car values increase in purchase price, the value has been diminishing more quickly year over year, especially for used cars. GAP is an appealing option that can help keep the finance discrepancy in check.
Especially, as car owners are facing rising costs for ongoing car maintenance and insurance premiums according CCC’s 2018 Crash Course report which adds to the financial pressure.4 More automation and technology in cars is leading to more complicated, computerized repairs, and insurance premiums have adjusted higher as they respond to a market with increased total loss costs and frequency. Distracted driving continues to be a concern as driving fatalities remain high (over 40,000 for the 3rd year according to the National Safety Council), as well as severe weather events (hurricanes, flooding, wind, hail, etc.) that are impacting consumers and their lending habits nationwide.5
2. Depreciation in the Market
As new car prices continue to increase, and residual values of used cars decrease, consumers are more frequently facing negative equity with their vehicles that are then being rolled into new car purchases. Edmund’s reported that nearly a third of buyers in 2017 traded in a car that wasn’t worth the remaining loan balance at trade-in value.1
Additionally, depreciation values are historically high for the first 36 months of car ownership. CarFax shares one way to think about depreciation is to assume your vehicles loses 20% after the first year, and then 10% annually after that.6 This has fed into an environment that is impacting GAP claims as total loss claims increase against cars with longer loan terms and depreciating value to help cover at least part of the outstanding balance.
3. A Lack of Consumer Education
In the event that a car is deemed a total loss, consumers expect insurance and GAP to be able to cover the loss, however that’s not always the case. Consumers are often unaware of how the decreasing value of their car may impact their loan, and in turn, their GAP coverage. Consumers are driven by monthly payment amounts without fully understanding how a lack of a down payment or extended loan terms could turn their loan upside down.
The result: When it comes time to file a GAP claim the amount of the loan actually exceeds the permissible percentage allowed (known as the loan-to-value maximum (“LTV”), which is typically 125-150%) is not covered by GAP. This leads to losses for both consumers and lenders placed in the unfortunate situation of being left with an outstanding balance after a total loss claim.
Click here to download our 2019 Changing State of GAP to read more about factors impacting the auto industry.
4 Ways to Change GAP Coverage in 2019
The current state of GAP is changing, and it’s important to understand what is driving these changes across the market. Looking ahead to the rest of 2019 and beyond, here are 4 things to consider when evaluating your own GAP program.
1. Evaluate the GAP Claim Process: Take a look at the current processes to see if there’s some changes that could be made to best handle the volume and amounts as total loss claims become more complex.
2. Invest in consumer education: A lot of consumer frustration stems around not understanding the GAP product purchased and their loan terms. Consider ways to help make GAP claim terms easy to understand.
3. Review accuracy of settlements: Take time to review the accuracy of settlements from the underlying Total Loss Carrier and consider tools to help ensure proper vehicle evaluation
4. Stay attuned to market conditions: The frequency of GAP claims with increasing total loss settlements is tied to changing market conditions and consumer behaviors
Allied recovered over $50 million in total loss claims in 2018. Click here to talk about our GAP and Total Loss product options.
About Allied Solutions
Allied Solutions, LLC is one of the largest providers of insurance, lending, and marketing products to financial institutions in the US. Allied Solutions uses technology based products and services customized to meet the needs of 4,000 clients along with a portfolio of innovative products and services from a wide variety of providers. Allied Solutions maintains over 15 regional offices and service centers around the country and is a subsidiary of Securian Financial Group, Inc.
Sources:1 CFPB. GAP. 2016. https://www.consumerfinance.gov/ask-cfpb/what-is-guaranteed-auto-protection-gap-insurance-en-797/
2 Edmunds. Should You Buy GAP Insurance for Your New Car? January 2017. https://www.edmunds.com/car-loan/gap-insurance-how-it-impacts-your-car-loan-or-lease.html
3 Experian. State of the Automotive Finance Market. Q4 2018.
4 CCC Information Services. 2018 Crash Course Report.
5 National Safety Council. Injury Facts. February 2019.
6 Carfax. Car Depreciation. November 2018. https://www.carfax.com/blog/car-depreciation
Content in the blog posts are the opinion and views of the writer, and don't necessarily reflect the opinions or views of Allied Solutions.