Vehicle Depreciation & Valuation Flashcards
7 cards from real GAP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Vehicle Depreciation & Valuation flashcards as text
In the context of vehicle financing, what does 'accelerated depreciation' mean for GAP risk?
Answer: When a vehicle loses value faster than the loan principal is reduced
In vehicle financing, accelerated depreciation refers to situations where the vehicle's market value declines faster than loan payments reduce the outstanding balance, widening the negative equity gap and increasing GAP exposure.
How do extended loan terms (72-84 months) affect the risk of negative equity for GAP underwriting purposes?
Answer: They increase risk because principal paydown is very slow in the early years
Extended loan terms result in very slow principal reduction in the early years due to front-loaded interest, prolonging and deepening the period of negative equity and increasing GAP exposure.
Which U.S. vehicle segment historically shows the slowest depreciation rate, reducing the need for GAP coverage?
Answer: Domestic pickup trucks and SUVs
Domestic pickup trucks and SUVs historically retain their value better than most other segments due to high consumer demand and utility, resulting in slower depreciation and lower GAP exposure.
Why is the 'depreciation curve' concept important for GAP product underwriting?
Answer: It models how vehicle value declines relative to the loan balance over time
The depreciation curve maps vehicle ACV against the outstanding loan balance over time, identifying the period and magnitude of maximum negative equity exposure that GAP coverage must be priced to address.
How does a larger cash down payment affect GAP exposure at loan inception?
Answer: It reduces GAP exposure by lowering the initial loan balance
A larger down payment directly reduces the initial loan amount, meaning the loan balance starts closer to or below the vehicle's ACV and significantly reduces or eliminates initial negative equity.
What effect does rolling negative equity from a previous vehicle into a new vehicle loan have on GAP risk?
Answer: It significantly increases GAP exposure from day one of the new loan
Rolling negative equity into a new loan immediately causes the borrower to owe more than the new vehicle's value from the very first day, creating severe negative equity before any depreciation of the new vehicle even occurs.
In which scenario would GAP coverage provide the MOST financial benefit to a borrower?
Answer: A new vehicle financed at 100% with an 84-month term, totaled in month 12
A 100% financed vehicle on an 84-month term totaled at month 12 represents maximum GAP exposure: steep early depreciation combined with minimal principal paydown creates the largest possible difference between ACV and loan balance.