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Gap Insurance: Win-Win Situation

Over the past decade, the evolution of the auto industry, particularly in the area of finance and insurance, seem to have put the department’s profits in peril. To combat these changes, dealers have armed themselves with an array of additional products to attempt to protect their department’s bottom line. To battle incentivized rates, vehicles carrying longer manufacturer warranties (some even including scheduled maintenance) and Internet competition the finance department has added products such as security systems, VIN etching, back-up monitoring systems, GPS and others. To the customer and to the lender, many of these are perceived as nothing more than “additional dealer profit.” A purchase, after all, takes place when value exceeds cost (mind you, I am not against selling these items, along with additional dealer profit - I am just saying that when considering the finance manager’s presentation, some of these items are harder to sell and harder to finance).

There is one product that now has won acceptance in some form or another in most states that really should be perceived as a win-win-win. That, of course, is GAP policies. GAP, which stands for Guaranteed Auto Protection, is relatively inexpensive coverage that still yields significant dealer profits, while protecting both the customer and the lender.

At our retail dealership, easily two-thirds of our customers trading in cars are in a negative equity position. This is nothing out of the ordinary for most markets. Even with a reasonable down payment, by the time you just add tax and tags most customers have financed at least MSRP or the retail book value of the vehicle when they leave the dealership. With some lenders advancing six thousand dollars or more over average wholesale value to quality credit customers, some will be in negative equity for four to five years. While there is always debate as to whether the dealer is doing a customer a favor by selling them a vehicle with an extended term, over-advanced loan, after the debate is over, as long as there is one dealership in the area and one lender willing to make the deal, then someone is going to sell the customer a vehicle. If it isn’t you, it will be someone else.

What I don’t believe is debatable, is the benefit of GAP insurance for these customers. Having been a dealer now for nearly 15 years, I have seen far too many occurrences where a customer has taken delivery and in less than 30 days they have turned their new vehicle into a total loss. I still remember one that in leaving the dealership, pulled out in front of an oncoming car, not making it one block. That customer may have been in the best situation to argue the valuation for insurance, but the others, unless they have purchased a stated-value policy or something similar, are generally left in a position where their insurance coverage leaves them with a significant deficiency balance that they must immediately pay off or find some other way to finance it. With GAP policies, the customer’s loan is paid off completely, including any deductible exposure from their insurance coverage. The customer, instead of blaming the dealer for the situation, now are not only appreciative, but able to repurchase another vehicle and more apt to return to your dealership.

It seems that aside from a few lenders still not wanting to finance GAP the biggest challenge to selling it stems from general lack of familiarity by the finance managers in presenting the product. In a recent survey of dealers and dealership employees on my Web site, it seems GAP finished a distant fourth behind finance reserve, extended warranties and credit insurance for favored products to sell in the finance office. It seems that old habits die hard, and the ‘pitch’ for credit life and disability insurance along with extended warranty sales were learned very early and that the inclusion of GAP insurance into a presentation was a change that many did not want to make. My opinion is that training and (if necessary) a compensation plan modification are all that are required to break through the barrier of resistance.

Who needs GAP insurance? I would suggest that anyone that is financing more than 85 percent of MSRP or retail book value, on a loan of 48 months or more (many would suggest that my guideline is still too low). I would also suggest that anyone that is leasing a vehicle needs it, unless GAP insurance is included in the acquisition cost or is somehow already built in. Add to those the individuals that drive more miles each year than average causing increased depreciation. GAP insurance started out in leasing years ago when the lenders (as the owners of the vehicles they were leasing) learned how valuable it was to protect their own interest. As you think about your own dealership’s customer base, how many of your customers other than cash transactions wouldn’t be in a negative equity situation if there vehicles were totaled or stolen in the first 50 percent of the loan term?

I was surprised during a discussion at my most recent 20 Group meeting at the relatively low penetration rate for GAP insurance, especially when compared to that of credit life and disability insurance. This is especially so in states like Indiana that cap credit life and disability commissions at 35 percent. With the relatively small difference in monthly payment (usually six to nine dollars) GAP is an easy presentation, all parties win and it returns high rewards to the dealership.

If your dealership is not selling GAP, or is doing so with lackluster results, consult with your F&I services provider or trainer. Through training of your finance manager (and perhaps a compensation plan modification) an increase in penetration rate of just 25 percent should be relatively easy and result in nearly $100,000 gross profit per year for every 100 units you retail per month. This along with a happier customer and lender base when untimely accidents do occur should make the decision to focus on GAP very easy.



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