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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 01/04/2020

At a glance

  • Gap insurance can help you pay your car finance if your car is written off or stolen
  • Gap insurance can be bought from a car dealer, an online broker or direct from the insurer
  • There are different types of gap insurance available

How does gap insurance work?

Gap insurance is often sold by car dealerships when you buy a new or second-hand car. Gap insurance is there to make sure you are not out of pocket if your car is written off or stolen.
It comes in a range of forms and the most common covers the gap or difference in value between what you paid for a car or the finance remaining versus the settlement from the insurer.

Gap insurance is needed because all cars depreciate, especially new vehicles, which typically lose between 10% and 40% in their first year. This means that if you needed to claim on your car insurance to replace your car (and it is more than 12 months old), you may find that the market value alone leaves a gap. This could leave you with unpaid car finance or needing to buy an older car or a reduced specification. Gap insurance will cover this, allowing you to pay back your car finance and/or fund a new vehicle.

If you buy a new car you may not need gap insurance

Many car insurance companies will replace cars under 12 months old with a brand new one. You should check if this is available on your car insurance policy and look carefully for any exclusions that limit your ability to claim new-for-old cover. Some insurers will not give you new-for-old cover if your car is stolen or you an accident is your fault.

What type of gap insurance do I need?

Here is a summary of the common types of gap insurance.

Finance gap insurance

This covers the gap between the outstanding amount of finance you have for the vehicle and the settlement offer from the insurer.

Insure the Gap

Get a quote for gap insurance now from Insure The Gap.

Negative equity gap insurance

Negative equity happens when you borrow more for a vehicle than it is worth. This can happen when you trade in a car, where the amount you owe on a loan is greater than the value of the car. This debt is then added to a new loan to purchase a new vehicle. You will need specific gap insurance to cover this negative equity.

Return to invoice gap insurance

This covers the gap between what you paid for the car and the pay-out offered by your insurer.

Return to value gap insurance

This is like return to invoice gap insurance, but this pays the gap between the insurance settlement and the value of the car when it was first purchased. This means if you purchase the car second-hand, you get its value when brand new and not just what you paid for it.

Vehicle replacement gap insurance

If you buy a used car, this insurance will pay you the amount you bought the car for less the value your insurer offers you for your vehicle. If you buy a new car, this insurance will be based on the amount you would pay for the equivalent new car today.

Personal contract hire insurance

This type of gap insurance will pay your outstanding contract hire agreement if your insurance pay-out is not enough to cover this. You can also find contract gap insurance that will repay any initial fees you paid at the start of your contract hire.

How is gap insurance calculated?

How much you will receive in gap insurance will depend on the type of gap insurance purchased, and the settlement figure offered by the insurer. Here is an example:
You buy a new car for £20,000. You take out a loan over five years at 20.8%. The loan will cost you £21,437.80 and is a payment of £357.29 per month.

On the third anniversary of having the car, you are involved in an accident and the car is written off. Most cars lose 50% of their value from new after three years. Your insurer offers you a settlement of £10,000.

You have £8,574 outstanding on your loan. Gap insurance would cover you either for the outstanding finance or up to the purchase value of the vehicle when new.

Common exclusions for gap insurance

You may not be eligible for gap insurance if:

  • The vehicle has mileage in excess of what the insurer will accept
  • The vehicle is older than what the insurer will accept
  • The vehicle was purchased privately and not through a dealer
  • You intend to use the vehicle as a taxi or as a hire car
  • The vehicle’s value is over a stated amount
  • You will need to check carefully with your insurer that your vehicle is covered by gap insurance.

Gap insurance FAQs

What does gap insurance stand for?

Gap insurance is the shortened name for an insurance called guaranteed asset protection.

Do I have to take out gap insurance?

Gap insurance is optional and is not a legal requirement.

Is gap insurance for new cars only?

You can buy gap insurance for second-hand or used vehicles; however these usually depreciate at a slower value than new cars and therefore any gap between what you pay and the value the insurer will give you is much smaller.

Will gap insurance pay for a new car?

If you originally purchased a new vehicle and have vehicle replacement gap insurance, then this will make sure you receive the difference between the car’s value when new and the settlement figure from the insurer.

What gap insurance do I need for PCP?

If you have a car under personal contract purchase (PCP), then you will need personal contract hire gap insurance. Make sure to check with your gap insurer what will happen to your insurance if you purchase the vehicle at the end of the contract term.

Should I buy gap insurance from a dealer?

Most car buyers will be offered gap insurance by the car dealership; however, this can often be more expensive than alternatives available directly from insurers or from insurance brokers online. Your car dealership is required by regulation to give you two days to consider if you want to take this product. You can use this time to compare gap insurance cover and prices.

Can I take out gap insurance after 12 months?

If you buy a new car and your insurer will replace it with a brand-new vehicle while this is less than 12 months old, then you will not want to over-insure yourself during this time. Some gap insurers will allow you to defer your gap insurance for 12 months, others will only let you purchase gap insurance cover before 12 months has expired.

Does gap insurance cover me if I am at fault?

Gap insurance should cover you whether you were at fault or not.

Can I cancel gap insurance from the dealership?

Gap insurers should provide you with a cooling-off period of between 14 and 30 days from your initial sign-up. During this time, you should be able to cancel in full as long as you have not made a claim on the policy during this period. Most gap insurers will accept cancellation at a later date, but you may find they will not refund you the premium and many will charge a cancellation fee. You should check your cancellation rights when you first buy gap insurance.

Can you get a refund for gap insurance?

If you cancel your gap insurance during your cooling-off period, then you should receive a full refund. If you cancel at a later point, then any refund is subject to your gap insurer’s terms and conditions and may come with a cancellation fee.

More Gap insurance FAQs

when should you cancel your gap insurance?

You should cancel your gap insurance if you sell your car. You may also want to cancel your gap insurance if the amount you owe on car finance is the same or less than the market value of the car.

How long is gap insurance valid for?

You can purchase gap insurance usually in 12-month periods, with most policies usually over three years and some gap insurers will have four or five-year policies available.

How much is gap insurance?

Gap insurance is usually around £5 to £10 per month. How much you pay will depend on the vehicle and the number of years of cover you require.

Can you remove gap insurance from a car loan?

Gap insurance is a stand-alone insurance policy and can be operated independently of your car loan.

How does a written-off car affect my credit score?

If you have used finance to buy a car and it is written off, then you will need to continue to make your monthly loan payments. If you fail to make your payments, this will affect your credit score.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

man driving car

At a glance

  • Gap insurance can help you pay your car finance if your car is written off or stolen
  • Gap insurance can be bought from a car dealer, an online broker or direct from the insurer
  • There are different types of gap insurance available

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