Following a total loss to the borrower's vehicle, Gap Insurance covers the difference between the loan payoff and the actual cash value settlement made by the borrower’s auto insurance policy.
We’ve all seen it happen: A borrower’s vehicle is a total loss, but the borrower’s auto insurance claim settlement will not pay off the loan balance. In today’s lending environment, more borrowers are stretching their loan terms to lower their monthly payments.
Borrowers seldom make down-payments on their car loans. This means the value of the vehicle is often much less than the loan balance. Fortunately, there’s an option to protect the borrower and the financial institution to cover the gap between a loan balance and vehicle value, called gap waiver insurance.
Upon a total loss to the financed vehicle, gap waiver insurance covers the difference between the remaining loan balance due and the actual cash value settlement made by an auto insurer. Gap waiver insurance coverage is for both new and used vehicle loans, balloon loans, and leases. Gap waiver insurance is particularly important for low or no down payment loans. Also, for extended loan terms, which slow down the amortization of the loan, leading to more gap exposure over a longer period of time.
It further benefits the financial institution by preserving customer relationships, preventing deficiency balance write-offs, creating fee income and encouraging the financing of a new replacement vehicle by the borrower. Gap waiver can be offered as an optional purchase to each borrower, or may be offered as a benefit for the entire loan portfolio.
Gap waiver insurance provides great benefit to the borrower, preserving a good relationship with the financial institution, while providing an important source of fee income to the financial institution. With over 60 years in the industry, Lee and Mason Financial Services can help you find better solutions to serve your customers, to reduce risk and to increase net income. Please feel free to connect with us today to get started.