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Insurance Abstract
A method of financing a purchase or a lease a depreciating asset
that includes determining a credit worthiness indication associated
with a purchaser or lessee and establishing a finance contract for
the lease or the purchase of the depreciating asset. A dealer is
a guarantor of the finance contract. The method further includes
issuing an insurance policy for a benefit of the dealer based on
a liability associated with being the guarantor. The liability is
based on at least the credit-worthiness indication and a value of
the depreciating asset. The method also includes paying a payment
associated with the finance contract. A portion of the payment based
on a cost of the purchase or the lease of the depreciating asset
and a cost associated with the insurance policy.
Insurance Claims
1. A method of financing a purchase or a lease a depreciating asset,
the method comprising: determining a credit worthiness indication
associated with a purchaser or lessee; establishing a finance contract
for the lease or the purchase of the depreciating asset, wherein
a dealer is a guarantor of said finance contract; issuing an insurance
policy for a benefit of said dealer based on a liability associated
with being said guarantor, wherein said liability is based on at
least said credit-worthiness indication and a value of the depreciating
asset; and paying a payment associated with said finance contract,
wherein a portion of said payment based on a cost of the purchase
or the lease of the depreciating asset and a cost associated with
said insurance policy.
2. The method of claim 1 further comprising transferring the depreciating
asset from said purchaser to a lender based on a payment default
associated with said paying said payment.
3. The method of claim 2 further comprising paying a face value
of said insurance policy to said dealer based on said transfer of
the depreciating asset from said purchaser to said lender, said
face value of said insurance policy is adapted to obviate said liability
associated with being said surety associated with said finance contract.
4. The method of claim 3 wherein said paying said value of said
insurance policy commences only after transfer of the depreciating
asset from said consumer to said lender and after a predetermined
period.
5. The method of claim 1 further comprising reporting a payment
history to a credit reporting agency based on said paying said payment.
6. The method of claim 1 wherein the liability is based on a difference
between a balance of the loan and a value of the depreciating asset
over a period of said finance contract.
7. The method of claim 6 wherein the liability is based on a principle
portion and an interest portion of the finance contract.
8. The method of claim 1 further comprises paying a face value
of the insurance policy to the dealer upon repossessing the depreciating
asset
9. The method of claim 1 further comprising reimbursing said lender
for costs associated with said finance contract.
10. A financing system comprising: a depreciating asset having
a value; a dealer that sells said depreciating asset for a purchase
price; a consumer that acquires said depreciating asset from said
dealer; said purchaser associated with a credit-worthiness indication;
a lender that provides a finance contract to said consumer in return
for payments associated with said finance contract, wherein said
dealer is a guarantor associated with said finance contract; and
an insurance policy for the benefit of said dealer based on a liability
associated with being said guarantor for said financing contract,
said liability based on said value of said depreciating asset and
said credit-worthiness indication of said purchaser, wherein a portion
of said payments is based on said purchase price of said depreciating
asset and a cost associated with said insurance policy.
11. A financing arrangement between a lender, a purchaser and a
dealer, the financing arrangement comprising: an asset that depreciates
over time; a finance contract for purchase or lease of said asset
from the dealer, wherein the dealer is a guarantor of said finance
contract; and an insurance policy valued to at least reimburse the
costs associated with said finance contract when said asset is repossessed.
12. A financing system for purchase or lease of a vehicle, financing
system comprising: a first value defining a capitalized cost associated
with the purchase or the lease of the vehicle; a second value defining
a credit worthiness indication associated with a purchaser or lessee;
and a scoring module that determines a purchase price or lease price
of the vehicle, said purchase price or said lease price of the vehicle
includes a cost of an insurance policy based on at least said first
value and said second value.
13. The financing system of claim 12 further comprising a third
value defining a residual value of the vehicle associated with a
period of the lease, wherein the scoring module determines said
purchase price for said insurance policy based on said third value.
14. The financing system of claim 12 wherein said credit worthiness
indication includes a credit score.
15. The financing system of claim 12 wherein said scoring module
determines a scoring bias, said scoring module determines said purchase
price based on said scoring bias and wherein said scoring bias is
based on a chance that the asset will be repossessed.
16. The financing system of claim 12 wherein said purchase price
or said lease price are defines an installment payment that includes
the cost of said insurance policy.
17. A method of leasing a vehicle from a top tier lender, the method
comprising: determining a credit score associated with a lessee;
establishing a lease for the vehicle, wherein a dealer is a guarantor
of said lease; issuing an insurance policy for a benefit of said
dealer based on a liability associated with being said guarantor,
wherein said liability is based on at least said credit score and
a value of the vehicle; and paying an installment payment associated
with said lease, said installment payment includes is based on at
least a lease payment and a cost associated with said insurance
policy.
18. The method of claim 17 further comprising repossessing the
vehicle from said lessee because of a payment default associated
with said installment payment and said lease.
19. The method of claim 18 further comprising paying a face value
of said insurance policy to said dealer when said repossession occurs.
20. The method of claim 17 wherein said liability is based on a
difference between a balance of the lease and a value of the vehicle
over a period of said lease.
Insurance Description
CROSS-REFERENCE TO A RELATED APPLICATION
[0001] This application claims the benefit of U.S. Provisional
Application No. 60/606,089, filed on Aug. 31, 2004. The disclosure
of the above application is hereby incorporated by reference as
if fully set forth herein.
FIELD
[0002] The present teachings relate to a financing system and method
and more particularly relate to an insurance system and method to
cover a liability for a party to a loan used to purchase or lease
a depreciating asset.
BACKGROUND
[0003] Typically, a consumer who chooses to purchase a new vehicle
may seek financing in the form of a loan or lease because of an
inability to tender payment in full at a time of purchase. Upon
purchase, the new vehicle begins depreciating immediately. Payments
toward the loan, however, are tendered in consecutive installments.
In one example, only twelve payments may have been tendered when
the consumer defaults on the loan. In this situation, the lender
who made the loan may choose to repossess the vehicle. Upon repossession,
the lender may seek reimbursement from the consumer for an outstanding
balance on the loan. The outstanding balance may in part be due
to the value of the vehicle 14 being less than the outstanding balance
on the loan.
[0004] To reduce the lender's exposure to the risk of having the
outstanding balance on the loan not satisfied by sale of the repossessed
vehicle, lenders typically will assess the credit worthiness of
the consumer prior to extending the loan. In some situations, the
credit worthiness of the consumer is below a threshold level such
that a top-tier lender will refuse to offer financing to the consumer.
With that said, loans through top-tier lenders may enhance the credit
worthiness of the consumer based on a payment history associated
with the loan. The payment histories (i.e., payment toward the loan)
are reported to credit reporting bureaus and thus favorable payment
histories may improve the consumer's credit.
[0005] When the consumer is unable to take advantage of the top-tier
lender, the consumer may turn to lending agencies that do not provide
the same benefits as the top-tier lending agencies. Moreover, the
purchaser may be unable to acquire a new vehicle due to the inaccessibility
of lease or finance programs due to aforesaid credit worthiness
thresholds. The ability to purchase a new vehicle for relatively
less money than it may cost to maintain an older vehicle benefits
the consumer and benefits the dealer and its associated companies.
SUMMARY
[0006] The present teachings generally include a method of financing
a purchase or a lease a depreciating asset. The method includes
determining a credit worthiness indication associated with a purchaser
or lessee and establishing a finance contract for the lease or the
purchase of the depreciating asset. A dealer is a guarantor of the
finance contract. The method further includes issuing an insurance
policy for a benefit of the dealer based on a liability associated
with being the guarantor. The liability is based on at least the
credit-worthiness indication and a value of the depreciating asset.
The method also includes paying a payment associated with the finance
contract. A portion of the payment based on a cost of the purchase
or the lease of the depreciating asset and a cost associated with
the insurance policy.
[0007] Further areas of applicability of the present teachings
will become apparent from the detailed description provided hereinafter.
It should be understood that the detailed description and specific
examples, while indicating the various embodiments of the present
teachings, are intended for purposes of illustration only and are
not intended to limit the scope of the teachings.
BRIEF DESCRIPTION OF THE DRAWINGS
[0008] The present teachings will become more fully understood
from the detailed description, the appended claims and the accompanying
drawings, wherein:
[0009] FIG. 1 is a diagram representing a financing arrangement
using an insurance policy in accordance with the present teachings;
[0010] FIG. 2 is a diagram representing a value of a loan relative
to the value of an associated asset in accordance with present teachings;
and
[0011] FIG. 3 is a schematic of a scoring module associated with
the insurance policy in accordance with the present teachings.
DETAILED DESCRIPTION OF THE VARIOUS EMBODIMENTS
[0012] The following description of the various embodiments is
merely exemplary in nature and is in no way intended to limit the
teachings, their application, or uses.
[0013] With reference to FIG. 1, an insurance policy 10 may be
issued to cover a liability of a party in a financial arrangement
to purchase or lease a depreciating asset in accordance with the
present teachings. The insurance policy 10 may have a face value,
a purchase price and a beneficiary. Upon an occurrence of a condition
associated with the insurance policy 10, the beneficiary is paid
the face value of the insurance policy 10. In one example, repossession
of the asset by a party associated with the financial arrangement
triggers a condition to pay the face value of the insurance policy
10.
[0014] The insurance policy 10 may be used in various financial
arrangements. In one example, a consumer 12 may lease or purchase
a vehicle 14 from a dealer 16. The insurance policy 10 may be used
to obtain a loan, a lease or other suitable financial arrangement
to purchase or lease the vehicle 14 or any form of depreciating
asset. The vehicle 14 may be a car, a truck, a boat, a plane, a
motorcycle, a motor home, other depreciating assets and combinations
thereof. It will be appreciated that the insurance policy 10 may
take other suitable forms such as a contract to reimburse or contract
for payment that contains a condition subsequent such when the condition
occurs a party is paid a predetermined value.
[0015] Unless the consumer 12 tenders payment in full to the dealer
16, the consumer 12 may obtain the loan or the lease to acquire
the vehicle 14 from a lender 18. The lender 18 will pay the dealer
16 in full for the lease or purchase price of the vehicle 14 in
return for installments (e.g., monthly payments) from the consumer
12. It will be appreciated that the lease or the loan may take the
form of other suitable financing contracts and the title of the
vehicle 14 may remain with various parties to the finance contract
and/or various parties may secure a lien against the vehicle 14
to otherwise ensure performance under the financial contract.
[0016] During a process for applying for the loan, the lender 18
and/or the dealer 16 may obtain a credit worthiness indication 20
of the consumer 12. The credit worthiness indication 20 may indicate
the ability of the consumer 12 to pay for the vehicle 14 and may
also indicate a propensity of the consumer 12 to experience a default
(i.e., failure to make payment), which may result in a repossession
of the vehicle 14. The credit worthiness indication 20 of the consumer
12 may be based on various factors including, but not limited to,
credit scores, credit histories, payment histories, net worth, savings,
other assets and other suitable indicators and combinations thereof.
[0017] Typically top tier lenders refrain from offering the loan
or the lease, when the credit worthiness indication 20 is unfavorably
low. Top tier lenders may include, for example, Ford Motor Credit,
GMAC Financing, etc. Other lenders (i.e., non-top tier lenders)
may offer financing but usually at relatively less advantageous
terms for the consumer 12.
[0018] In one example, the dealer 16 may serve as a guarantor or
surety for the loan from the lender 18 to the consumer 12. In this
arrangement, if the consumer 12 defaults on the loan or a repossession
of the vehicle 14 occurs, the lender 18 is able to seek reimbursement
from the dealer 16 for remaining balance of the loan not otherwise
satisfied by sale (auction or otherwise) of the vehicle 14. The
insurance policy 10 may be purchased by (or for) the consumer 12
and may cover a liability. The liability is based on the possibility
that the need arises to reimburse the dealer 16 as the guarantor.
[0019] It will be appreciated that the lender 18 may repossess
the vehicle 14 when a default occurs on the loan, the lease or other
financial contract. The lender 18 may then sell (auction or otherwise)
the vehicle 14 to seek to recover funds owed to the lender per the
loan, the lease or other financial contract. If the sale of the
vehicle 14 does not cover the balance of the loan, the lease or
other financial contract, the lender 18 may seek reimbursement from
the consumer 12 and/or the dealer 16, which is illustrated by the
dashed lines in FIG. 1. The dealer 16, as the guarantor of the loan,
the lease or other financial contract may seek payout of the insurance
policy 10 to pay the reimbursement sought from the lender 18 and
thus satisfy the remaining balance of the loan, the lease or other
financial contract.
[0020] Repossession therefore may serve as an event that when it
occurs satisfies a condition in the insurance policy 10, such that
the beneficiary of the insurance policy 10 is paid the face value
of the insurance policy 10. In this example, the face value of the
insurance policy 10 is about equal to the remaining balance of the
loan or the lease minus the value of the vehicle realized upon a
sale because of the repossession. The insurance policy 10 therefore
permits the consumer 12 with the credit worthiness indication 20
that is relatively poor (i.e., a higher propensity for repossession)
to acquire a new vehicle through the top tier lender using the insurance
policy 10.
[0021] In one example, a lease price is determined for a new vehicle
using the insurance policy 10. The lease price is typically based
on a residual value of the vehicle, which necessarily includes the
anticipated depreciation of the vehicle. The consumer 12 and/or
the dealer 16 associate with the lender 18 to apply for and provide
the lease.
[0022] The lender 18 may deny application for the loan or the lease
based on the credit worthiness indication 20. The consumer 12 and/or
the dealer 16 may contact an insurance issuer 22 and share with
the insurance issuer 22 some or all of the information from the
credit worthiness indication 20 of the consumer 12. In this regard,
the dealer 16 may become the guarantor for the loan or the lease
between the lender 18 and the consumer 12. The insurance issuer
22 then determines a purchase price for the insurance policy 10
such that the face value of the insurance policy will about cover
the liability of the dealer 16 if asked to reimburse costs associated
with being the guarantor of the loan or the lease.
[0023] In one example, the liability of the dealer 16, when asked
to reimburse costs associated with being the guarantor of the loan
or the lease, may change over time as the amount of principle and
interest paid as well as the value of the vehicle 14 fluctuates
over time. In this regard, the insurance policy 10 and more specifically
the face value of the insurance policy 10 may change over time to
be commensurate with the liability faced by the beneficiary, namely
the dealer 16. In other examples, the insurance policy 10 may have
a fixed value such that when the repossession of the vehicle 14
occurs (or other triggering event), a fixed amount is paid to the
beneficiary. It will be appreciated that various combinations of
fixed and/or floating face values may be used in support of various
forms of finance contracts.
[0024] Upon consent of the parties, the lender 18 pays the dealer
16 a capitalized cost for the loan or the lease. The capitalized
costs may include the lease or the purchase price of the vehicle
14, the purchase price of the insurance policy 10, taxes, fees and/or
other costs associated with transaction. In return, the consumer
12 is obligated to make loan payments to the lender 18 over a period
(e.g., 5 years) to pay a principle and an interest associated with
the loan.
[0025] With reference to FIG. 2, a diagram depicts the possible
remaining balance on the loan or the lease based on a time of repossession
of the vehicle 14 (FIG. 1). Region A depicts the amount of money
paid (or owed) to the lender in interest over time. Region B depicts
the amount of money paid (or owed) to the lender in principle over
time. Region C depicts the depreciating value of the vehicle over
time. A time of repossession (T.sub.RP) graphically indicates that
vehicle was repossessed and the remaining principle, indicated by
Region B', is greater then the value of the vehicle indicated by
Region C. A gap (G.sub.1) between the principle (Region B) and the
value of the depreciated asset (Region C) is a graphical representation
of the lender's risk, which in turn is at least the dealer's risk
as guarantor for the debt associated with the lease or the loan.
[0026] The insurance policy 10 however mitigates the risk because
in the event of repossession, the insurance policy 10 is paid such
that the face value of the policy covers the gap (G.sub.1) and thus
eliminates the risk to the dealer 16. In this regard, the dealer
16 pays the lender 18 an amount of money to cover the gap (G.sub.1),
which represents the remaining balance after the vehicle 14 is sold
(auctioned or otherwise) for a value (V) associated with the vehicle
14.
[0027] In another example, a gap (G.sub.2) between the interest
(Region A) and the value of the depreciating asset (Region C) is
a graphical representation of the lender's risk, which in turn is
at least the dealer's risk as guarantor for the debt associated
with the lease or the loan. In this regard, the insurance policy
10 pays the lender 18 an amount of money to cover the gap G.sub.2,
which represents the remaining principle balance (Region B') and
remaining interest payments (Region A') after the vehicle 14 is
sold (auctioned or otherwise) for a value (V) associated with the
vehicle 14.
[0028] When the dealer 16 is willing to be the guarantor or surety
for the loan, the dealer 16 may sell more vehicles 16 to consumers
12, who may otherwise not qualify for a traditional financing arrangement
with a top-tier lender. The consumer 12 may now be able to lease
(or buy) a new vehicle 14 that typically has a factory warranty
and lower maintenance costs. The consumer 12 obtains the loan or
the lease from the top tier lender, which may benefit the consumer
12 because payment histories are reported to the credit bureaus
and may increase the credit worthiness indication 20.
[0029] In one example, the purchase price of the insurance policy
10 is determined based on the credit worthiness indication 20 of
the consumer 12 and the cost of the vehicle 14. More specifically,
a score bias is determined based on at least the credit worthiness
indication 20. The insurance issuer 22 may use the score bias to
determine the purchase price of the insurance policy 10. The score
bias increases (i.e., increases the cost of the insurance policy
10), when credit worthiness indication 20 is relatively less favorable
(e.g., includes bankruptcies, balances owed, etc.). A more favorable
credit worthiness indication may provide a less expensive insurance
policy. Naturally, if the credit worthiness indication 20 is sufficiently
favorable, the insurance policy 10 may not be necessary.
[0030] In one example, the score bias may be quantified and be
based on, among other things, a credit score. The credit score of
the consumer 12 is readily available from various sources. Table
1 below shows exemplary score bias values based on a range as follows:
TABLE-US-00001 TABLE 1 Exemplary Score Bias Credit Score Range 950
greater than 600 1050 about 550-about 599 1200 about 500-about 549
1300 about 450-about 499 1350 about 425-about 449 1400 about 400-about
424
[0031] The purchase price of the insurance policy 10, which may
be a component of the purchase or lease price of the vehicle 14
may be determined using the score bias with the following equation:
Score Bias-Credit Score/1000.times.{(CC-LEV)/2}=Purchase Price
[0032] "CC" defines the capitalized cost associated with
the loan or the lease. "LEV" defines a lease end value
or a residual value of the vehicle 14, which may be determined by
the lender 18 and/or the dealer 16. In a purchase arrangement, it
will be appreciated that the residual value of the vehicle may not
be applicable.
[0033] In one example and with reference to FIGS. 1 and 3, a software-based
scoring module 100 may be used to implement the present teachings.
The scoring module 100 may be used to determine a purchase price
102 or a lease price 104, a component of which may be the cost of
the insurance policy 10, based on capitalized costs 106 of the vehicle
14, the credit worthiness indication 20, which may include a credit
score 108 and/or a residual value 110 of the vehicle 14. The capitalized
costs 106 may include not only the lease price or purchase price
(not including the cost of the insurance policy 10) of the vehicle
14 but may also account for taxes, fees, interests, underwriting
charges, etc. It is to be understood that only the relevant computations
of the scoring module 100 are discussed, but that other software-implemented
instructions may be needed to control and manage the overall operation
of the system and/or module.
[0034] For example, the consumer 12 (FIG. 1) has a credit score
of 510. The consumer 12 may not be able to obtain financing from
the top-tier lender for lease or purchase of the vehicle 14. With
the insurance policy 10, however, the consumer 12 would be able
to lease or purchase the vehicle 14 because the dealer 16 is willing
to be the guarantor of the loan if the insurance policy 10 is purchased
by the consumer 12 for the benefit of the dealer 16. The insurance
policy 10 has a sufficient face value to cover the possibility of
the reimbursement costs associated with being the guarantor. The
consumer 12 using the insurance policy 10 may lease the vehicle
14 for predetermined period, e.g., three years.
[0035] With reference to FIGS. 1 and 3, the dealer 16, the lender
18 and/or the insurance issuer 22 may use the scoring module 100
to determine a purchase price 102 and/or a lease price 104, from
which an installment payment may be determined for the loan or the
lease. The scoring module 100 may determine the purchase price 102
and/or the lease price 104 based on at least a capitalized cost
of the vehicle 106 and a credit score 108. The scoring module 100
may also determine the purchase price 102 and/or the lease price
104 based on a residual value of the vehicle 110.
[0036] In one example, the capitalized cost of the vehicle 106
may be about $20,000. The residual value of the vehicle 110 may
be about $12,800. The credit score 108 based on the credit worthiness
indication 20 (FIG. 1) may be 510. Without the insurance policy
10, the monthly cost of the vehicle 14 would be about $200, when
the consumer 12 is able to obtain the loan or the lease from the
top tier lender. With the insurance policy 10 and the credit score
of 510, the installment payment for a lease with the insurance policy
10 would be about an extra $69.00 per month. As such, the consumer
12 is able to lease a new vehicle from the dealer for $269.00 per
month, which only $69 per month more than a typical lease agreement.
With the insurance policy 10, no co-signer is needed, no more money
down is necessary and interest rates do not need be increased to
reflect the credit score as typically done.
[0037] In one example, the insurance policy 10 may also include
a feature that pays the consumer 12 a refund of the purchase price
of the insurance policy 10 if the loan or the lease is paid in full
and no installment payments have been made outside of the agreed
terms (e.g., late payments). The refund may be paid as installments
during the loan or the lease as incentives or may be paid as a lump
sum at the end of the loan or lease period.
[0038] In one example, the insurance policy 10 may include a quarantine
period, which may be a period about equal to the length of time
necessary to complete the first twelve payments of the loan or the
lease. In the quarantine period the lender 18 and/or the insurance
issuer 22 may be able to pursue the consumer 12 and/or the dealer
16 for outstanding balance on the loan or the lease should a repossession
of the vehicle 14 occur.
[0039] In a further example, the insurance policy 10 may include
an extended quarantine period. As such, the loan or the lease may
still be in good standing, notwithstanding some payments may have
been made late. Should missed payments result in repossession at
a later date (outside of the above quarantine period), the insurance
issuer 22 and/or the lender 18 may maintain the right to pursue
the consumer 12 for the balance of the loan or the lease.
[0040] In one example, the insurance policy 10 includes the stipulation
that the consumer 12 maintains insurance (e.g., auto and/or liability
insurance) or performs other contractual duties. If the consumer
12 fails to maintain insurance or perform other duties, the insurance
issuer may pursue the consumer 12 for the cost of the insurance
and/or the cost of satisfying the contractual duties.
[0041] In one example, the insurance policy 10 stipulates that
the insurance issuer 22 may pursue the consumer 12 for a voluntary
repossession. Voluntary repossession, for example, is simply dropping
the vehicle 14 off in an attempt to obviate the loan or the lease.
The insurance issuer 22, however, retains the right to seek reimbursement
from the consumer 12 for the balance of the loan or the lease.
[0042] The description of the teachings and the various embodiments
are merely exemplary in nature and, thus, variations that do not
depart from the gist of the teachings are intended to be within
the scope of the teachings. Such variations are therefore not to
be regarded as a departure from the spirit and scope of the teachings.
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