Gap Insurance: Protecting Your Car from Depreciation
There’s a lot to be said for car finance in all its various forms – the ability to get a brand-new car without having to stump up tens of thousands of pounds in cash (and who can really afford to do that?), the resulting security in having a car that isn’t going to break down as soon as you drive it away and if it does, someone is going to immediately fix it!
The days of scrabbling around used car dealerships for the perfect deal are far from gone and for many represent the best way to get a good car, but the range of car finance deals means that it’s no longer the only option and if you want something with all the benefits of modern technology, then you can.
There is a problem though that weighs in the mind of many. Let’s say you take out finance for a car worth £28,000, it depreciates to £18,000 in the first year and then you are in an accident that writes it off? You’ve probably paid something around £6,000 in monthly payments, and the insurance company coughs up the £18,000 market value for the car. It doesn’t take a maths genius to realise there’s a £4,000 deficit there - £4,000 that you now owe the finance company.
Enter GAP insurance.
What is GAP insurance?
Guaranteed Asset Protection (GAP) is an extra layer of insurance you can take out alongside (or later on, in addition to) your car financing, whether that’s a personal contract hire (PCH), business contract hire (BCH), personal contract purchase (PCP) or hire purchase (HP) agreement.
Simply put, GAP insurance covers you for any difference in the residual value (or market value) of your car that the insurance company is willing to give you in the case of a total loss of your vehicle, and the amount that remains on your car finance agreement.
Unlike many levels of car insurance cover, GAP insurance is a single one-off payment (usually for a few hundred pounds or less) that you make at the beginning of your finance contract.
Do I need GAP insurance?
Unlike standard car insurance, there is no legal requirement for GAP insurance, so why bother to pay out the extra money?
Like most insurance, GAP insurance is there to cover you for something you don’t think is going to happen but when it does, you are really pleased it is in place.
Most people do not take their car out of the driveway thinking ‘today is the day I’m going to have an accident’, and for most days that’s absolutely the case and safe driving and general alertness gets them to the end of their journey without incident.
What is GAP insurance useful for?
Should something happen, and your car is declared a total loss by your insurance company, do you really want to be footing an enormous bill owed the finance company? Bad enough that now you no longer have a car, but to have to continue paying for it is adding a painful financial insult to an already sore injury!
If your finance agreement is such that you are likely to end up owing more than the market value of the car should something happen, then GAP insurance is a solid investment. Situations where GAP insurance makes sense include:
Your car depreciates quickly.
You have a high level of interest on your finance agreement.
You opted for a small initial payment at the start of the finance agreement.
Your loan is for a longer term (three years or more).
You are on a Personal Contract Purchase (PCP) or Hire Purchase (HP) agreement with a ‘balloon’ payment at the end.
When is it not worth getting GAP insurance?
When buying a used car
GAP insurance is really for new cars. There’s an argument for using it with used cars, especially ones that are nearly new, but the depreciation in such a situation is considerably lower and there’s far less use for GAP insurance.
When you don’t have fully comprehensive car insurance
This is unlikely, especially with a new car on a finance agreement, but if you don’t have fully comprehensive insurance then your GAP insurance isn’t valid.
When your deposit payment was large
If you’ve already forked out a large chunk of the money towards the car then you have a lot less to worry about regarding depreciation and may not need GAP insurance.
When your standard insurance covers you
In some cases, your main car insurer may include GAP insurance or a 12-month car replacement option which covers very similar ground as part of your fully comprehensive insurance. It’s worth checking with them before you opt for the additional level of cover.
When your finance package takes it into account
Some finance packages come with integrated GAP insurance.
When you can personally afford to cover the shortfall
If you know you can (and are willing to) pay for the difference should the worst happen, then you don’t need GAP insurance (though it might still be a sensible financial option).
What are the different types of GAP insurance?
GAP insurance comes in three main versions, each designed with a specific need in mind:
Finance GAP insurance
This basic level of GAP insurance is the most common and is designed for the situations described earlier in this article – making sure you are not left out of pocket and owing the finance company money if your car becomes a total loss.
Because finance GAP insurance is only there to ensure any loan or car finance deal is repaid, the result will be a situation where you are left without a car. Your main car insurance will pay the market value for the car, the GAP insurance will pay the difference between that and the amount left on the finance, everyone will be happy and walk away. Except you, who will literally be walking and not driving.
In order to get another car, you will have to start again with a new finance agreement (and find the appropriate level of deposit) – unfortunate but true.
Return-to-invoice GAP insurance
A step up from the basic finance insurance, return-to-invoice GAP insurance pays the difference between the residual value reimbursed by your car insurance company and the original amount paid for the car. This sounds similar but is, in fact, a huge improvement on the basic finance version.
As a simplified example, consider a car worth £20,000 at the point of sale. Your initial payment is £2,000 and monthly payments of £300.
After one year you have paid £5,300 (£2,000 plus 11 x £300). The car has depreciated and has a residual market value of £13,000. The total remaining on finance is £14,700 (£20,000 minus the £5,300 paid).
Upon an accident resulting in total loss, your main insurer will give you £13,000 (the residual value).
With basic finance GAP insurance, you will receive an additional £1,700 – the difference between the residual value and the amount remaining to pay on the finance.
With return-to-invoice GAP insurance, you will receive an additional £7,000 – the difference between the residual value and the original invoice value of the car. This extra money means you will be able to repay the finance in full and have enough to pay the deposit on a new car.
Though it is more expensive than finance GAP insurance, return-to-invoice GAP insurance is ideal for people who will want to immediately get back on the road after a write off accident.
Brand new car GAP insurance
Occasionally known as Vehicle Replacement Insurance, brand new car GAP insurance gets you back on the road in a new similar vehicle as fast as possible, paying the difference between the residual value returned by your standard insurers and the cost of a new model of your car as it exists today.
This elite level of insurance used by people who want to just keep going without too much delay following a crash is obviously the most expensive level of GAP insurance but provides a completely comprehensive service valued by those who opt for it.
When does GAP insurance pay out?
As explained above, GAP insurance is designed to cover the shortfall between a standard insurance payment and the amount needed to satisfy the finance. It is not a replacement for car insurance, nor is it in place for any other use.
GAP insurance will only trigger if:
The car is a total loss (colloquially known as a ‘write off’) or unrecoverable (stolen, for example)
The car was fully insured with comprehensive car insurance
The main insurance company find no fault with the claim and make a payment
GAP insurance will not cover any disputes you have with the residual value offered by your main insurer, nor will it pay for any large excess charges you have agreed to with your main insurer (although many GAP insurance policies pay £250 of the excess).
It also does not cover any additional costs that are not part of the cost of the car (for example, extended warranties or breakdown cover), or the cost of any extras you have added to the car (improved stereo etc.).
How do I get GAP insurance?
Most leasing companies and car finance brokers will offer you GAP insurance at the time of buying or leasing the car. Like all other insurance, you are under no obligation to take the GAP insurance out with your finance company and may find a considerably better offer by shopping around.
If you have already bought or leased a new car and don’t have GAP insurance, don’t worry – you can easily purchase additional GAP insurance after the initial purchase, although bear in mind that it can be harder to get a good deal the longer you leave it.