CU Insight: Contributing factors to rising GAP claims
Thursday, September 7, 2017
Posted by: CU Insight
Editor’s Note: This article was originally featured on CU Insight on Aug. 30, 2017 and has been modified.
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.
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