Should GAP Insurance and Vehicle Service Contracts Be Sold By Dealers Only

During a recent CUNA Lending Council panel discussion, a Washington State auto dealership was asked to state their position on the topic of GAP Insurance and Vehicle Service Contracts offered by credit unions.  The dealer’s General Manager, Mary Byrne provided a testimonial that was starkly opposed to credit unions offering these types of ancillary programs at all.  In a recent article published by CUToday.com, she was reported as saying:

“I truly believe that is our customer. I believe I’m in the business of selling cars and you are in the business of lending money. I don’t think there is any confusion. I think we’re in the business of selling extended warranties—you are in the business of lending money. Dealerships’ margins have shrunk to almost nothing; it’s a good month if the dealer can make 2% on gross sales.”

Byrne provides a one-sided argument for the position for auto dealerships as it concerns ancillary income from GAP and Vehicle Service Contract sales and the impact they have on the overall profit margin.  There is one major flaw in her reasoning.  Once the sale is done and the financing is secured with the credit union, the credit union now owns that car, NOT the dealership.  Doesn’t the credit union have a right to protect their collateral and members with (in many cases) superior protection products at a much better value to the consumer?

We know that credit unions have far less market share as a percentage of financing opportunities in New England and across the US.  In fact, in many markets, up to 80% of car buyers arrange their financing through a dealership at the time of purchase. Both credit unions and auto dealers would probably agree that annual percentage rates are extremely competitive and it’s incredibly difficult to yield a healthy ROI solely from interest income alone. To that end, credit unions need the opportunity to earn non-interest income from ancillary products as well, especially in indirect lending environments where they are paying an average of 2% to the dealers in an upfront flat.

Despite the necessity of a credit union’s financial wellbeing, should credit union members not also have a right to purchase similar coverages that are offered at the dealership?  It makes sense that Byrne would be upset. Just in New England alone, we are seeing GAP prices of $799-$899 at the dealers compared to $299-$399 at Credit Unions (with a superior product – in most cases). With Vehicle Service contracts, the average profit at a dealer can range from $1000-$1500, where the Credit Unions make a modest profit of a few hundred dollars.  Much like when the internet brought an age of online pricing and comparison, Byrne is clearly starting to feel the pinch of an open market with informed consumers who are interested in better value and better service at claim time.

All pricing aside, it is important to ask any customer who they would prefer to help them when they total a vehicle or have a mechanical breakdown. Who will go the extra mile for the member long after the sale?  The ultimate trump card for Credit Unions is this specialized personal assistance – rarely played when comparing auto dealers’ products versus the Credit Union products. Credit Unions offer GAP Insurance and Vehicle Service Contracts to protect members from unplanned events that can happen during the life of a loan. Our data states that 82% of members will have at least one breakdown within a 5 year period, and nearly 20% of vehicle accidents result in a total loss. These products serve as a necessary component in helping to offset the risk of costly charge-offs from delinquency, rooted primarily in members’ inability to pay repair costs.

From inception, it has been every credit union’s mission to offer services that safeguard the financial commitments of its members, and ultimately the health of the credit union.

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