Trade-In Value Guarantee Opens a New Marketing Approach for Lenders, Dealers, and Manufacturers
Trade-In Value Guarantee Opens a New Marketing Approach for Lenders, Dealers, and Manufacturers

A trade-in guarantee program, when first viewed, may look like a lease-end, keep-the-vehicle value program for purchased vehicles. The basic promise is simple enough: an obligor promises the vehicle buyer a minimum resale value if the vehicle buyer replaces the vehicle during a specified replacement time window.

Trade-in guarantee programs, however, are marketing programs. In addition, the actual guaranteed trade-in value may be the least important factor in estimating the expected loss cost and in determining the wholesale cost the obligor will charge the provider for making the contractual promise.

If the vehicle buyer’s actual trade-in value at replacement time is more than the guaranteed trade-in value, the vehicle buyer receives the actual trade-in value. Otherwise, the vehicle buyer receives the guaranteed trade-in value, and the obligor pays the difference between the two values. Examples are shown in the following chart.

MSRP Trade-in Value Guarantee ($) Appraised Value at Replacement Transaction ($) Trade-in Value Guarantee Benefit ($)
Example 1 24,000 12,720 13,920 0
Example 2 24,000 12,720 11,520 1,200
Example 3 24,000 12,720 9,120 3,600

The complimentary version has no identifiable charge to the vehicle buyer, so it is a clear win-win decision for the vehicle buyer. A provider like an original equipment manufacturer (OEM) or lender can likely obtain an insured program for $300 or less if the provider is adding the benefit on all vehicles or loans, or a specified subclass.

The optional version presents the provider with degrees of cost recovery or even a profit on the sale, but the underlying motivation remains a marketing opportunity. As with most F&I protection products, the obligor “buys the product wholesale and sells it at retail.” The wholesale cost can range from $300 to $500, depending on the terms and conditions, the maximum benefit available, and the volume of anticipated sales. The provider ends up with a no-cost or low-cost product that has real marketing potential.

One optional approach is to treat the program as a typical dealership F&I office protection product, but this means a retail price similar to GAP.

Possible Providers

Possible providers include OEMs, dealerships, direct lenders, and indirect lenders.

The most obvious of possible providers is the OEM.

Hyundai released the newest component to its Hyundai Assurance protection package on May 1, 2011. A complimentary trade-in value guarantee is provided on all new 2011 and 2012 vehicle purchases (not leases or fleet sales). The ad campaign kicked off during the NBA playoffs and was another masterful commercial in the same league as the original Hyundai Assurance “walkaway” component in 2009. The 30-second commercial leaves one word in the viewer’s mind—GUARANTEED. The Hyundai program is administered by Interstate National Dealer Services.

Another OEM program has recently been created for a comparable soon-to-be-released complimentary promotion. This program was designed by Brian Olson, Kenny Olson, and Tony Wanderon of TradeCycle Management/Family First Dealer Services (TCM/FFDS) using its TradeLock trade-in value guarantee product. TradeLock is administered by cynoSure Financial, Inc. and insured by a residual value insurance carrier.

Since 2009, Subaru of America has offered a slimmed-down version of a trade-in guarantee. The Subaru dealership will provide the customer with a guaranteed trade-in amount if the customer trades in a pre-owned Subaru on the purchase of a new Subaru.

A dealership is the next provider candidate. The dealership has the option of a complimentary program or an optional program. “There are challenges entering the F&I office that already has established programs,” said Brian Olson of TCM/FFDS. “But when dealers see the demand from consumers wanting programs that hit home with current media trends, like protecting resale values, these programs quickly become standard practice. In addition, these programs can be made available on cash purchases, opening up new opportunities for the dealers and OEMs.”

A direct lender, such as a credit union, is a clear potential provider because it presents the lender with a direct method to bring the vehicle buyer back to the lender during the repurchase phase.

An indirect lender is also a potential provider of a complimentary product, but the promise probably will require a dual trigger of the buyer returning to the same dealership and the dealership then placing the replacement purchase financing with the same indirect lender.

Large national indirect lenders may be able to make a unilateral lender-only promise requiring only that any replacement dealership place the replacement purchase financing with that indirect lender.

Relating Terms and Conditions to Marketing Goals

As with all obligor promises, the product designer can specify the exact benefit, the terms, and conditions for qualifying for the benefit. Now that a few programs are being marketed, administrative/marketing organizations, obligors, or insurers have current programs to start with and then modify.

Today’s marketplace programs contain conditions that serve specific marketing goals. For a dealership, dealer group, or OEM program, these are some of the conditions and goals they serve:

  • For complimentary programs, the vehicle must be bought during the promotion period.
  • For the current sale transaction, the trade-in guarantee serves to counter the vehicle buyer’s purchase objection that the OEM’s/make’s historical or prospective resale values are a concern to the vehicle buyer.
  • The trade-in value applies to a specific time window for the replacement purchase. This period can be set with the goal of advancing the repurchase time cycle.
  • The vehicle buyer must return to the provider to purchase the replacement vehicle.
  • The vehicle buyer must have all scheduled maintenance performed, AND the maintenance must be performed at the provider’s dealership(s). The goal is to improve dealership service revenue and to raise dealership, dealer group, or OEM absorption rates (the percentage of dealership overhead covered by gross profit from service and parts).
  • The replacement vehicle must be a financed purchase through provider-arranged financing or for an OEM, possibly a captive financing arm.

For a lender, similar conditions and goals apply, but the primary goal is to be the first stop when the vehicle buyer begins the search for the replacement vehicle. Various versions and new options are just now being explored. The lender may be the sole provider, or there may be various combinations of lender plus dealership, dealer group, or OEM. Some of the dealership program requirements, such as performing all scheduled maintenance, may be retained to control loss costs even though the lender does not have a specific marketing goal in mind.

Loss Frequency and Severity

The development of the loss frequency contains some or all of the following components:

  • Probability that the vehicle will be in service during the qualified replacement time window and will not be disqualified (e.g. commercial use), multiplied by
  • Probability that the vehicle will be traded-in on a qualified replacement vehicle during the qualified replacement time window, multiplied by
  • Probability that the vehicle buyer will return to the provider for the replacement vehicle, multiplied by
  • Probability that the vehicle buyer will have performed scheduled maintenance at the specified service provider, multiplied by
  • Probability that the vehicle buyer will finance the replacement at the qualified financing source, multiplied by
  • Probability that the vehicle buyer will remember the protection, and THEN multiplied by
  • Probability that the guaranteed trade-in value will exceed the appraised value.

Finally, the average loss severity must be determined. This can be done by high-powered modeling, but by this point, a conservative estimate will likely serve for pricing purposes.

About the author
Gary Fagg

Gary Fagg


Gary Fagg is a consulting actuary with CreditRe, a firm specializing in actuarial, accounting, risk management and risk transfer solutions related to vehicle protection products. CreditRe serves insurers, reinsurers, producers and producer-affiliated reinsurers regarding VSC, GAP and occasionally, for old-times sake, credit-related insurance.

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