GAP Insurance Explained: Do You Need It with Car Finance?

GAP Insurance Explained: What It Is and Whether You Need It

When you buy a car on finance, your standard motor insurance covers the market value of the vehicle at the time of a claim. But what happens if your car is written off or stolen and the insurance payout is less than what you still owe on finance? This is the gap that GAP insurance is designed to fill.

What Is GAP Insurance?

GAP stands for Guaranteed Asset Protection. It is a supplementary insurance policy that covers the financial shortfall between what your standard car insurance pays out and what you originally paid for the vehicle, or what you still owe on your finance agreement.

Cars depreciate rapidly. A new car can lose 15 to 35 percent of its value in the first year alone. If the worst happens and your car is written off, your standard insurance will pay the market value of the car at the time of the claim, which could be significantly less than what you paid or what you still owe.

How Does GAP Insurance Work?

Here is a practical example:

You buy a car for twenty thousand pounds on PCP finance. Two years later, the car is worth fourteen thousand pounds, but you still owe sixteen thousand pounds on your finance agreement (including the balloon payment). Your standard insurance pays out fourteen thousand pounds (the market value), leaving you with a two thousand pound shortfall that you would still need to pay to the finance company.

With GAP insurance, that two thousand pound gap would be covered, meaning you are not left out of pocket.

Types of GAP Insurance

There are several types of GAP insurance, each covering different scenarios:

Finance GAP: Covers the difference between your insurance payout and the outstanding finance balance. This is the most common type for car finance customers.

Return to Invoice (RTI) GAP: Covers the difference between your insurance payout and the original purchase price of the car. This can be more generous than finance GAP if you paid a large deposit.

Return to Value (RTV) GAP: Covers the difference between your insurance payout and the car’s value at a specific point, such as the date you took out the GAP policy.

Vehicle Replacement GAP: Covers the cost of replacing the vehicle with an equivalent new model. This is the most comprehensive type and is typically more expensive.

Do You Need GAP Insurance?

GAP insurance is not compulsory, but it can provide valuable peace of mind in certain situations. You should consider it if:

• You have little or no deposit. Without a deposit, you are more likely to be in negative equity in the early stages of your agreement, meaning you owe more than the car is worth.
• You have a PCP agreement with a large balloon payment. The balloon payment can create a significant gap between the car’s market value and what you owe.
• Your car is brand new. New cars depreciate fastest in the first year, creating the largest potential gap.
• You would struggle to cover a shortfall from savings. If your standard insurance payout fell short of what you owe, could you afford to pay the difference?
• You are financing an expensive vehicle. The higher the value of the car, the larger the potential gap.

When GAP Insurance Might Not Be Necessary

You may not need GAP insurance if:

• You paid a large deposit, reducing the amount financed
• Your car is older and has already undergone significant depreciation
• Your HP agreement is nearing its end and you have built up substantial equity
• You have savings that could cover any potential shortfall
• Your standard insurance includes new car replacement cover for the first year

How Much Does GAP Insurance Cost?

GAP insurance is relatively affordable compared to the protection it provides. Prices typically range from one hundred to three hundred pounds for a policy lasting two to three years, depending on the value of the car and the level of cover.

It is important to shop around. Dealers often sell GAP insurance at inflated prices, sometimes charging several hundred pounds more than standalone providers. You can buy GAP insurance from specialist providers online, often at a significant saving compared to the dealer price.

Where to Buy GAP Insurance

You have several options:

• From the dealer: Convenient but often the most expensive option.
• From a specialist GAP insurance provider: Usually cheaper and available online with a straightforward application process.
• From your car insurance provider: Some insurers offer GAP insurance as an add-on to your standard motor policy.

Under FCA rules, you have a fourteen-day cooling-off period after purchasing GAP insurance from a dealer, and you can cancel and buy elsewhere if you find a better deal.

Key Things to Check Before Buying

Before purchasing a GAP insurance policy, check the following:

• What type of GAP cover is included: Make sure it matches your needs (finance GAP, RTI, or vehicle replacement).
• The maximum claim limit: Ensure it is high enough to cover the potential gap.
• The policy term: Check how long the cover lasts and whether it aligns with your finance agreement.
• Exclusions: Read the policy carefully for any exclusions that could affect a claim.

The Bottom Line

GAP insurance is a sensible precaution for anyone buying a car on finance, particularly if you have a large outstanding balance or minimal deposit. It costs relatively little for the protection it provides and can save you from a significant financial headache if the worst happens.

If you have any questions about GAP insurance or car finance in general, the team at Happy Motor Finance is here to help. Get in touch today.