The $5K Question: Can Credit Unions Close the GAP?
The car sitting in your borrower’s driveway may be more of a financial liability than an asset. As loan terms stretch to 84 months and beyond, the illusion of affordability is colliding with the reality of depreciation. A recent CarEdge survey found that borrowers with these extended loans are, on average, $5,000 underwater.
For lenders, this is not a theoretical problem. It’s a portfolio-wide risk that shows up in repossessions, total loss claims, and—soon enough—the refinancing market.
The deficiency dilemma
When a borrower defaults and the vehicle is repossessed, the story rarely ends with the auction block. Long-term loans mean balances decline much more slowly than vehicle values, leaving lenders exposed to thousands of dollars in deficiency balances.
On average, lenders are already staring down a $5,000 shortfall per loan when an underwater vehicle is repossessed. Many of those balances will never be collected, forcing lenders into charge-offs that directly erode portfolio performance. In other words, the “affordable” 84-month loan of yesterday becomes the unrecoverable loss of tomorrow.
GAP: A safety net with holes
While GAP coverage helps offset lender losses in a total loss scenario, it’s not a complete safety net—especially with longer loan terms creating deeper negative equity. Depreciation Protection Waivers (DPW) address a different exposure, offering equity protection during normal ownership events like trade-ins, refinances, or early payoffs, and helping lenders reduce portfolio stress.
GAP can soften the blow by covering the deficiency balance and shifting liability from lender to insurer, but that protection is only as strong as program penetration. Borrowers without GAP remain the lender’s responsibility, and even with GAP in place, rising claim frequency and severity introduce new pressures. A $5,000 average deficiency becomes a $5,000 average claim—and as volumes increase, GAP carriers may struggle to price for the risk.
The takeaway: GAP and DPW aren’t stacked on the same loan, but when strategically offered across different borrower segments, they complement each other—helping credit unions broaden protection, support members, and stabilize portfolio performance.
Refinancing on the horizon
Ironically, the same dynamic fueling risk may also fuel opportunity. As borrowers realize the weight of negative equity, refinancing options—often through fintechs and credit unions—will gain traction.
For lenders, this signals both a competitive threat and a strategic opening. Those who can offer refinance solutions that restructure high-risk loans into more sustainable terms may not only retain borrowers but also reduce charge-off exposure. The refinancing boom is coming; the question is whether traditional lenders will participate or cede ground to disruptors.
Executive briefing: What lenders need to know
- Deficiency balances are mounting: Average shortfalls of $5,000 put charge-offs firmly in play, especially in repossessions.
- GAP is a partial solution: It protects against total losses but leaves repossessions uncovered and depends on strong penetration rates.
- Claim severity is rising: GAP providers will feel profitability pressure as both volume and payout size increase.
- Refinancing is both risk and opportunity: Fintechs and credit unions will seize the moment—lenders who sit idle risk losing borrowers and absorbing higher losses.
Long-term loans may have made vehicles affordable upfront, but they’ve also created a systemic vulnerability. Lenders must rethink their approach to risk management—strengthening GAP penetration, preparing for higher deficiencies, and positioning themselves to ride (rather than resist) the refinancing wave ahead.
This content was first featured with CU Insight.