GAP insurance is a financial protection option that can be used to protect your finances during the first years of your car’s life. This is especially true if you have financed the purchase with car finance such as leasing or hire purchase.
GAP insurance policies will cover the difference between your vehicle’s true value and the remaining finance settlement amount on your lease or hire agreement if your vehicle is damaged or stolen.
GAP insurance policies generally provide coverage in the event that the vehicle is stolen or damaged. It is possible to believe that your motor insurance policy will protect you in case of a claim. Fully comprehensive insurance won’t cover the vehicle’s actual market value in many cases. This could result in a significant gap between the vehicle’s original purchase price and what the insurer values it.
Your vehicle may be written off due to theft or accidental damage. If your vehicle has a finance agreement, your insurance company will base your valuation on the current Glass’s Guide price at the time of your claim. The resultant valuation will be substantially lower than the price paid at the time of purchase, with the gap increasing as the vehicle ages. This is compounded by the fact that the insurance company valuation may be lower than your outstanding finance balance, which will leave you responsible for any shortfall after the claim has been paid.
Let’s say, for example, that you buy a car new at PS15000. This is a very low price on today’s market. The car is stolen two years later. Your insurance company will offer you the current market price, which is PS7000. PS8000 has just been lost! Although you might feel that the valuation is too harsh, it actually represents the average depreciation over two years for many of today’s most popular vehicles. You could have avoided financial loss if you had purchased a Vehicle replacement gap insurance policy. This policy would cover the cost of a replacement vehicle, up to the original purchase prices.
Even worse, if your vehicle was purchased with a loan, you may find that there is a significant gap between the insurance company’s valuation and the finance settlement. Once your vehicle is written off by the insurance company, you are responsible for any outstanding finance. You are also reliant solely on the car’s value to clear the finance amount. This is not likely in today’s market.
This is a quick example of GAP insurance working on a car bought on finance:
- You buy a car for PS18000, and you drive it home from the dealer’s showroom.
- You can borrow PS16000 for a 5-year period after putting down a deposit in the amount of PS2000 at an APR rate 8%. Monthly repayments of PS319.93 are due. The total amount due on the finance agreement is PS19196, plus your initial deposit. This makes a total payment of PS21196.
- Twelve months later, you are in an accident and your insurer declares your car a total loss. Your car still has a PS14000 owing to the finance company. However, your car now only has a PS12000 value based on an average monthly loss of PS500. You owe the finance company more than the car’s market value.
GAP insurance policies will cover the difference between your insurance company’s valuation and the finance settlement amount. In this case, it would be PS2000. GAP insurance coverage is not all the same. Policies can vary from basic coverage that bridges the gap in between the invoice price and your insurance valuation, to more comprehensive (and valuable) Vehicle Replacement Gap Insurance that covers a replacement vehicle in case of a claim.