Car GAP insurance and car finance
If your car is written off or stolen, your insurance payout might not cover what you originally paid or still owe on your car finance agreement. GAP insurance is designed to help cover the shortfall, so you're not left out of pocket.
But how does it work exactly, what does it cover and how does it work with a car on finance? Here’s everything you need to know so you can make an informed decision about whether it’s right for you.
What is GAP insurance?
Although Car Finance 247 don’t currently offer GAP insurance, it’s short for Guaranteed Asset Protection. It’s a type of cover that helps you avoid being out of pocket if your car is written off or stolen.
If that happens to your car, your car insurance provider will typically pay out its current market value, not what you originally paid or still owe. And because cars lose value quickly, there’s often a shortfall between what the insurer pays and what you still owe for a car bought on finance.
This is where this vehicle shortfall insurance comes in. It covers the difference so you’re not left paying for a car you no longer have (depending on your policy terms).
What does GAP insurance cover you for?
GAP insurance is there to protect you financially if your car is written off or stolen. What’s covered under your GAP insurance depends on the type of policy you choose.
For example, it may cover the gap between what you get from your insurance payout and your outstanding car finance balance (finance GAP insurance). Or, it could cover the gap between the insurance payout and the amount you paid for the car (return-to-invoice GAP insurance).
With vehicle replacement GAP insurance, it usually covers the difference between your insurance payout and the cost of a brand new replacement car.
There are a few different options to choose from, so let’s look at GAP finance types in more detail.
Different GAP insurance types
There are six common GAP insurance types, each designed for different situations:
Finance GAP insurance: Ideal for drivers with a car on finance, this policy covers any remaining balance on your finance agreement if your car is written off and the insurance payout doesn’t cover what you still owe.
Return to invoice (RTI): This type of GAP cover pays the difference between your insurance payout and the price you originally paid for the car. It brings you back to your full purchase price.
Return to value: Rather than covering what you paid, this policy bridges the gap between your insurance payout and the car’s value when it was brand new.
Vehicle replacement GAP insurance: If your car’s price has gone up since you bought it, this policy covers the cost to buy a brand new version of the same make and model.
Negative equity GAP insurance: This option is for those who’ve rolled outstanding debt from a previous finance deal into a new one. It helps cover the extra you owe if your car is worth less than your total finance balance.
Lease GAP insurance (Contract Hire GAP): Designed for leased vehicles, this cover can pay the remainder of your lease payments if the car is written off.
How does GAP insurance work on a financed car?
GAP insurance on a financed car is designed to cover the difference between what your car insurance pays out if the vehicle is written off or stolen, and what you still owe on your finance agreement.
Here’s how it works:
Imagine you bought a car for £20,000 on finance. You’ve been keeping up with your monthly payments, but then your car is unfortunately written off.
Your insurer values the car’s market value to be £15,000. However, you still need to pay the remaining £19,000 of your car finance agreement.
Without GAP insurance, you’d be responsible for covering the £4,000 shortfall yourself. But with GAP insurance, that difference may be covered (depending on your policy). This could help protect you from unexpected costs for a car you no longer have.
GAP insurance may offer extra financial protection, whether you have a PCP or a HP car finance deal. Let’s look at this in full.
GAP insurance on PCP
At the start of a PCP (Personal Contract Hire) deal, your monthly payments are based partly on the difference between the car’s initial price and its Guaranteed Future Value (GFV), which is an estimate of what the car will be worth at the end of your contract.
Most cars lose value over time (called depreciation), and sometimes the actual value when your car is written off or stolen is less than the predicted GFV. In this case, your insurer will only pay out the car’s current market value. If this is lower than the GFV and what you owe still on your finance contract, you’ll have to pay the shortfall.
GAP insurance may cover this difference, depending on the type of policy you have.
GAP insurance on HP
HP (Hire Purchase) is similar, but it doesn't involve GFV. With HP, you gradually pay off the full price of the car. Like with PCP, your car will depreciate over time. And, if the car is written off or stolen before you finish paying, the insurer will only pay the current market value, which might be less than what you still owe on finance. Again, GAP insurance can help cover the gap between what the insurer pays and what you still owe, depending on the policy type.
Is GAP insurance worth it?
Whether or not GAP insurance is worth it for you depends on your individual circumstances, but here are a few things you might want to consider:
Depreciation: Most cars start to lose value as soon as you drive them away. New cars can sometimes drop in value by about a third within the first year. GAP insurance may help you avoid paying the shortfall yourself if your car is written off.
Car finance: If you’re on PCP or HP, there could be a gap between what the car is worth and what you owe if it’s written off or stolen. GAP insurance could help you avoid being left with that unpaid balance.
Peace of mind: Even if you paid for your car outright, GAP insurance could still help. If your car is written off or stolen, it might cover the gap between your insurer’s payout and the cost to replace it.
If you’re buying a car on finance, especially a brand-new one, GAP insurance could be worth it. It’s not essential, but it can give you added protection if your car is likely to lose value quickly or you owe more than the car is currently worth.
Remember to compare policies carefully, check what’s included, and decide based on your own budget and situation. Always read the full terms and conditions before buying.
Disclaimer: This content is for general information only and is not financial advice. GAP insurance is optional and may not be suitable for everyone. Policies, terms, and eligibility vary by provider. Always check the full terms and conditions before purchasing. If you’re unsure, consider seeking independent financial advice.