How VSI Insurance Protects Lenders Against Charge-Offs
Written by: HUB Financial Services
Lenders today face increased risks from automobile loan charge-offs due to ever increasing inflation costs and economic uncertainty. Nowadays, borrowers also have greater power to manage their vehicle insurance policies via online options and that is not always a good thing for the financial institution.
This freedom can come with greater risk through errors in placing the coverage or through monetary inadequacies. However it occurs, lenders are responsible for making sure the borrower is complying with their loan agreement and has adequate insurance coverage in place to protect the bank’s interest in the collateral.
Unfortunately, borrowers sometimes fail to comply with these insurance requirements of their loan agreement, which can put the lender at risk of losing money if the vehicle is damaged in an accident or stolen. Also, charge-offs in the vehicle category tend to tick higher during economic downturns and we start to see more skips. Successful lenders need to constantly strive to minimize these risks by tracking insurance and force placing or buying blanket insurance. An easy way for Lenders to mitigate risk is by using VSI insurance.
What is VSI Insurance?
VSI insurance, also known as Vendor Single Interest Insurance, is a specific type of insurance that aims to protect a lender’s portfolio of vehicle loans by transferring the risk to the insurance company. This can be crucial since VSI will protect the lender against the risk of substantial losses should the borrower not maintain adequate insurance on their vehicle.
How is VSI Insurance Paid For?
In most cases, a lender will pay a one-time premium on VSI insurance when they originate a loan with the borrower. In many states, its costs can be passed on from the lender to the borrower, in order to mitigate lender expenses. However, lenders can also choose to pay their VSI premium based on the monthly outstanding amount of the portfolio’s loan balance.
VSI vs CPI: Insurances to Protect Lender
Along with VSI insurance, some lenders also consider using CPI insurance for protection against loss from vehicle loans. Known as Collateral Protection Insurance, CPI insurance targets its coverage only on those borrowers who have not complied with the insurance portion of their loan agreement, rather than the entire portfolio itself. In essence, this allows the lender to target coverage only toward the loans of borrowers they believe will need coverage.
In most cases, this may be no more than three percent of all loans within a lender’s portfolio.
However, CPI does require the use of a vendor that has a specialized tracking system that allows for reliable and accurate communication between the lender, borrower, and insurer. This will allow everyone to know when coverage will need to start or end and how much coverage to put in place. However, because letters are being sent to borrowers and coverage is being force placed, it can lead to decreased borrower satisfaction with their lender.
Overall, VSI insurance, since it does not require the financial institution to send letters and force placed insurance, tends to make life easiest for both lenders and borrowers. Since a lender will never know for sure just which borrowers may wind up having problems with the insurance coverage on their vehicles, VSI insurance can offer peace of mind for the lender by protecting them against the unexpected.
Pros and Cons of VSI Insurance
Like any type of insurance coverage, VSI insurance comes with various pros and cons. The biggest advantage it offers is providing blanket coverage on all vehicle loans in the lender’s portfolio without having to track for insurance and it spreads the cost of the coverage across every borrower. However, since the cost of coverage is usually passed on to consumers, borrowers can view this as an unnecessary fee, which may lead to some customer dissatisfaction. This is mostly a non-issue though.
Perhaps most importantly, it will help protect a lender from a variety of unexpected situations that may ultimately lead to charge-offs, such as skips or repossessed collateral with physical damage. Since it can take only a few vehicle loans going bad for a lender to suffer financial losses, VSI insurance is looked at as a very viable and easy option in terms of coverage.
Reduce Charge-Offs Through VSI Insurance
Once a lender has VSI insurance, they can reduce charge-offs in a multitude of ways. A typical VSI policy will include coverage not only against skips, but also for non-filing errors and omissions, uninsured physical damage, and theft.
VSI claims typically pay the actual cash value or the cost of repairs to a vehicle, whichever is the lesser amount. VSI claims typically pay the actual cash value or the cost of repairs to a vehicle, whichever is the lesser amount. Also, waiver of actual cash value coverage is a common option added to these policies in order to get a higher claim settlement. A vehicle loan must already be in default before a VSI claim can be submitted, but thanks to its single-interest feature, VSI has all settlements on claims going directly to the lender.
By taking advantage of the premium being spread across all borrowers through VSI insurance, lenders can further reduce charge-offs due to not having CPI premium on individual loan balances. These lower loan amounts help to decrease charge-off amounts. This is one of the additional advantages of having VSI vs CPI insurance.
Even though loan agreements do require borrowers to maintain proper insurance coverage on their vehicles, VSI insurance offers many advantages by providing blanket protection, spreading premium across all borrowers in the portfolio, continuous coverage, and eliminating the need to manually track the vehicle insurance of all the borrowers within the lender’s vehicle loan portfolio.
VSI insurance is a convenient and easy option for today’s lenders. To gain more control over potential charge-offs and eliminate insurance tracking, reach out to our team of experts today!