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.
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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 have an accident that is your fault.
Here is a summary of the common types of gap insurance.
This covers the gap between the outstanding amount of finance you have for the vehicle and the settlement offer from the insurer.
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.
This covers the gap between what you paid for the car and the pay-out offered by your insurer.
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.
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.
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 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.
You may not be eligible for gap insurance if:
Gap insurance is the shortened name for an insurance called guaranteed asset protection.
Gap insurance is optional and is not a legal requirement.
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.
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.
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.
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.
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.
Gap insurance should cover you whether you were at fault or not.
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.
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.
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.
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.
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.
Gap insurance is a stand-alone insurance policy and can be operated independently of your car loan.
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.
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.