Change is not always easy, particularly for busy credit unions that are laser-focused on meeting their members’ daily needs. Heritage Federal Credit Union ($523.1M, Newburgh, IN), however; an organization dedicated to meeting the changing financial needs of its membership, understands that sometimes in order to better serve a broader membership base, change is sometimes necessary.
Guaranteed Asset Protection (GAP) is not a unique product offering for credit unions. Lenders know that it’s a product that offers their borrowers a level of auto loan protection while generating non-interest income, and most borrowers know that GAP can help “fill the gap” between their loan balance and insurance payout in the event of a theft or total loss. However, in a competitive auto loan market with interest rates in a low holding pattern and shrinking margins, more and more lenders are thinking outside the box to find creative ways to generate non-interest income.
In other industry news, consumer borrowing behavior has shifted in a way that puts them at an increased risk for GAP exposure, making sufficient vehicle protection coverage even more critical to auto loan borrowers. As Mark Hein, CEO of SWBC’s Financial Institution Group, explained recently on the SWBC LenderHub blog, “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 10 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.”
The desire to protect more of their members is what drove Heritage to consider upgrading its vehicle protection coverage. As John Phipps, chief lending officer, explained, while standard GAP wasn’t inadequate, it didn’t provide full benefits to the entire membership base, including members who had good equity positions in their financed vehicles.
“Since all members’ vehicles depreciate over time, the benefit to the member is actually increasing over time. The PowerBuy benefit helps us protect more members—including the borrowers who put money down when they purchase their vehicle,” Phipps said.
Aside from the advantages of providing better vehicle protection to more of its membership base, the credit union also achieved the following sales results while members upgraded their their vehicle protection coverage:
Increased vehicle protection product sales by nearly 50% in the first six months of implementation
Increased contribution margin by 76%
Increased GAP production by more than 44%
To learn more about Heritage’s successes, click here to download the full case study.
Ronni Martinez is vice president of specialty auto products for SWBC's Financial Institution Group.