The current economic
environment has served as a nice setting for the revival of debt protection in
the auto industry. Hyundai was the first automaker this year to introduce such
a program, followed by Ford and General Motors. Fortunately, you don’t have to
be a dealer of any one of those companies to offer this lead-generating
product.
Debt-protection products date
back to the 1980s. They have been used for first mortgages, real-estate secured
and home equity lines of credit (HELOCs), as well as open-ended accounts and
revolving credit cards. What that means is it’s highly likely the lenders you
work with today already have debt-protection programs in place, or are
considering offering them in the near future. But before you start calling your
lenders, it’s critical that you understand what debt protection is.
While debt protection may
look and feel like simplified credit insurance, it’s not. Rather, it acts as a
component of a loan, as it is viewed as a contract between the lender and the
customer. It’s one of the reasons why it offers no added exposure to the
dealer.
Regardless of how it is
categorized, debt protection is typically offered by credit insurance vendors
as an alternative to traditional loan insurance. As for lenders, programs are
specific to each source. However, most lenders do provide coverage, which means
dealers should be able to maintain lender choice. Insurance companies also
offer debt-protection programs. In some cases, these programs allow dealerships
to create their own branded program while still using an insurance policy to
shift the risk back to the insurer.
To further understand how
debt protection works, here are five basic philosophies behind this burgeoning
product category.
1. Debt Protection Brings
Peace of Mind: Playing to customer concerns is always a good strategy, and when
the economy is weak, it’s even more critical. Offering “life events” coverage
for such things as job loss and illness can help take away some of the fear
that keeps shoppers from making a deal.
2. Debt Protection Fits More
Consumers: Unlike credit insurance, debt protection products don’t have health
and maximum age requirements, so more borrowers qualify. And when debt
protection is offered using branded program promotions for specific markets,
both lenders and auto dealers benefit from improved customer retention and
market penetration.
3. Debt Protection Is Simple
to Sell: With no insurance license required, debt-protection programs are
effective, attractive and easy to sell.
4. Debt Protection Fits
Either National or Niche Programs: Since debt protection is regulated at the
federal level, lenders don’t have to tailor the programs to each state’s
insurance regulations. That means they can create one national, private-label
program, or shape the benefits and price points of multiple programs to meet
unique borrower characteristics.
5. Debt Protection Is Not
Insurance, It Is an Addendum to the Loan: Your compensation will be set by your
lender, not by the insurance company or the state. Administration rules will
vary, but the administration will most likely take less effort than other
add-on products such as GAP, warranties or insurance products.
Because debt protection is an
add-on to a loan, you don’t have to be a Hyundai dealer to offer this
sales-generating tool. Just start inquiring about the product with your lender
or insurer, and you might soon get access to your own consumer assurance
package.
John F. Kilgore is vice president of Banking Lending
Services for CSC, a Fortune 200 company and independent, third-party servicer
in both lending and insurance. He can be reached at jkilgore@csc.com.