Guaranteed asset protection, that mainstay of finance and insurance profits, is under pressure.
Demand for GAP policies -- which cover customers who owe money on their vehicles if they are stolen or destroyed in a crash -- is closely tied to new-vehicle volume.
And while new-car sales are expected to reach about 12 million this year, up from 2009's 10.4 million, they're still low compared with the 16 million-plus of several years in the past decade. "Our GAP sales are down from the high-water mark of the new-car industry of a couple of years ago," says Ron Coombs, COO of JM&A Group in Deerfield Beach, Fla. "There are fewer opportunities to sell GAP as fewer cars are sold."
GAP is still a big deal. A rough calculation suggests that sales of GAP policies on new vehicles should account for more than $500 million in dealership gross profits this year. That's based on an estimated GAP penetration of about one-third of all new-vehicle indirect loans sold through dealerships -- and an estimated dealership markup of about $300 for each GAP sale.
Dealers and companies in the business say GAP typically retails for $600 to $800. The dealership cost is about half.
But while dealerships are having success marketing other F&I products, such as extended service contracts or tire and wheel coverage, GAP is proving to be a harder sell.
GAP appeals most to the new-car customer who takes out a big loan compared with the value of the vehicle over the long term. That buyer risks being caught with a big loan balance if the car is stolen or totaled. Without GAP, the customer would be liable for that amount.
But auto lenders are keeping a lid on loan-to-value ratios and requiring bigger down payments to limit their risk. In April, the average loan was for 88 percent of asset value, according to the Federal Reserve Board. For all of 2007, the average was 95 percent of value.
A higher loan-to-value ratio made GAP more attractive to consumers. With less equity in the deal, they were more likely to be upside down. In addition, a higher ratio made it easier to finance GAP and other F&I products as part of the vehicle finance contract.
One positive factor for GAP sales is that loan terms are lengthening as people try to lower their monthly payments. According to the Fed, the average auto loan term is approaching 63 months as of April 2010, up from a recent low of about 59 months in the first quarter of 2009.
Captive finance company Ford Motor Credit Co. recently trimmed dealer prices for GAP a bit and put some internal marketing effort into promoting GAP sales to dealers. Ford Credit's GAP sales are up about 10 percent from the prior year, says spokeswoman Margaret Mellott, although she wouldn't say what Ford Credit's GAP penetration is.
Mike Fitzpatrick, dealer principal at Mike Fitzpatrick Ford in Union, Ga., says Ford Credit cut dealer prices by $5 to $135 for 60 months -- which, he says, makes Ford Credit GAP a bargain. The dealership charges a retail price of $699.
Tony Wanderon, president of Allstate Dealer Services in Jacksonville, Fla., says demand for GAP has held fairly steady -- except that new-vehicle sales are down overall, and that affects GAP sales.
"We still see positive consumer feedback," he says. "Lenders are very positive about the product. We don't see demand decrease, but we see volumes decrease just because sales are down. We haven't really seen consumers backing off."