5 Tenets of Pink-Slip Protection
Debt protection might look and feel like credit insurance, but it’s not. Listen to what this lending services expert has to say about this buyer-incentive product.
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.
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