At Galpin Motors Inc. in Southern California, bigger lender advances this year mean more consumers are opting for guaranteed asset protection, or GAP, insurance, which pays the difference between a vehicle's loan balance and its cash value if the vehicle is wrecked or stolen.
GAP penetration on Galpin's finance deals is around 35 percent, a slight increase after dropping in 2008 and 2009 as a result of the recession and credit crisis, says Michael Schwartz, finance director.
Back then, lenders were limiting advance rates to a maximum of 110 percent of a vehicle's value, Schwartz says. Consumers put "a lot more money down to get the deal approved, so GAP wasn't as important to them."
Now advance rates are as high as 125 percent, he says, so down payments are shrinking, and GAP is back up at Galpin.
But at Kuhn Honda-Volkswagen in Tampa, Fla., GAP penetration has stayed steady from the recession through today, finance director Phyllis McCallie says. It's one of the two most important products sold by Kuhn's finance office, she says.
"Most people are carrying negative equity into their transaction," McCallie says. "We want this customer as a return customer, and if they total the car and still owe $5,000 on it, then they've got an issue."
Those two experiences are typical of U.S. dealerships. About half of the respondents to an unscientific Automotive News survey say GAP penetration rates were stable through the recession and remain so. Another third say GAP penetration dipped as advances tightened in 2008 and 2009 but that penetration has improved in the past year.
Given the changes in the market, GAP penetration might have been expected to fall significantly, says Tony Wanderon, former head of Allstate Dealer Services, a major GAP provider. But that doesn't appear to be the case.
Wanderon says industrywide GAP penetration appears to be in the mid-to-upper 30s, about where it was in 2008. Finance managers have stepped up their explanation of the product to customers to help keep penetration rates stable, he says.
"Historically, when F&I managers have more time to spend with the customer, they sell more," he says.
Higher used-vehicle prices
Soaring used-vehicle values also might have been expected to lower GAP take rates. Higher values would trim negative equity in the event of a loss and, theoretically, reduce a customer's perceived need for GAP.
But the finance directors at Galpin and Kuhn say that hasn't been a factor. Used-vehicle values are volatile, so customers still have no certainty on what their car will be worth if it's totaled in a year or two, the directors say. Fewer than 10 percent of dealers responding to the Automotive News survey said that higher used values reduced customer motivation to buy GAP.
"I do not think the vehicle buyer grasps this change, so GAP sales are far more influenced by dealer menu structures, incentive plans, etc.," says Gary Fagg, a consulting actuary with CreditRe of Hurst, Texas.
Dealers responding to the survey reinforced that notion. About 40 percent credited increases in penetration to more emphasis on training and selling the product.
Ally Financial, formerly GMAC, credited training for its increased GAP sales in the past year. Ally spokesman Tony Sapienza says dealers who use its training, menus and performance tracking tools see an average 30 percent improvement in insurance product sales.
Maroone: “Pick your products.”
Today's economic climate also may help keep rates stable. GAP may be an easier sell because many customers have been upside down -- or have owed more on a purchase than the purchase was worth -- on a car loan or mortgage, Wanderon says.
For dealers answering the Automotive News survey, a customer's experience with a negative-equity situation -- car or house -- was the second-biggest factor driving GAP penetration gains. About a quarter of dealers cited it as a reason.
"If a customer has had an experience with a negative-equity situation, they're certainly more prone," says AutoNation Inc. COO Michael Maroone. That said, fewer customers these days are automatically in a negative-equity situation, Maroone says. GAP isn't one of AutoNation's top F&I products.
AutoNation, the largest U.S. dealership group based on new retail unit sales, focuses on service contracts and prepaid maintenance. Penetration of those products is up; GAP penetration is down, Maroone says.
GAP penetration peaked at 27 percent of AutoNation's finance contracts around 2006. It stayed near that level through 2008 and in 2009 dropped to 21 percent, where it has remained. Maroone cites the company's focus on other products and shrinking finance advances as contributing factors. And he doesn't foresee anything changing in the short term.
"When you've got limited advances and limited numbers of adds -- additional product sales -- you pick your products carefully," he says. "And you pick products that create the most value and the most connectivity with your customers."
Other retailers also put more effort into other products.
At Suburban Collection, which has stores in Michigan and Florida, GAP is purchased on 40 percent of nonlease contracts, says Gary Allgeier, director of finance. That's up slightly from two years ago as Suburban, the nation's 13th-largest auto retailer based on new retail unit sales, has put more effort behind training finance managers to sell the product. GAP had dipped into the low to mid-30s during 2008 and 2009, he says.
Still, GAP isn't a core product because 50 percent of Suburban's sales are leases, which typically include GAP, Allgeier says.
Allgeier prefers to allocate employee effort and resources to drive products that can be sold to all customers -- whether they lease, finance or pay cash. Those include service contracts, appearance protection and wheel-and-tire plans, he says.
GAP "is not a core product because it doesn't apply to all customers."