If you’re worried that your car loan is greater than the current value of your car, you may need to buy a gap insurance policy. If your car is ever stolen or written off, the insurance payout won’t cover the outstanding car finance — leaving a gap you need to cover. Gap insurance solves that problem, but is it worth it for you? Read on for the answers.
Do I Need Gap Insurance?
Gap insurance is only essential if the value of your car is worth less than outstanding motor finance. That said, it can come in handy if you ever want to buy a new car to replace the old one in the event of theft or write-off.
A standard comprehensive car insurance policy will provide you with the funds to buy a replacement car of a similar age and condition. If you’d prefer a brand-new replacement, gap insurance will pay the difference. And from just £100 for three years of cover, buying a policy often makes economic sense.
What Gap Insurance Covers
In the UK, there are three main types of gap insurance:
Vehicle replacement — This type of gap insurance covers the difference between what your insurer will pay in the event of a write-off or theft and either the cost of a brand-new replacement or the price at the time you bought it if it’s a used car.
Contract hire — This type of gap insurance is designed for people who are leasing their vehicle and want insurance for the difference between the market value and the remaining motor finance.
‘Back to invoice’ — This type of gap insurance covers the difference between your insurer’s payout and the original sale price or the outstanding car loan.
Gap Insurance Exclusions
It’s important to know what’s not covered by gap insurance before deciding whether or not it’s for you.
● Gap insurance doesn’t apply to third-party insurance policies
● It won’t cover deductions made by your insurer; for example, deductions made due to missed premium payments
● It won’t cover the cost of alterations and additions such as spoilers, premium alloys and modifications
● Gap insurance only applies to official write-offs and thefts
Is Gap Insurance Right for Me?
It’s important to remember that a comprehensive insurance policy will cover the replacement of a stolen or written-off car. This means that gap insurance is only of use in one of the following scenarios:
You want your replacement car to be brand new
An insurance policy will only cover the market value of a car at the time of theft or write-off. If you have your heart set on getting a brand-new replacement straight from the factory, gap insurance will cover the difference.
You owe more than the value of your car
Particularly at the beginning of a car finance agreement, you may owe more for your car than it’s worth on the open market. Other issues such as depreciation and damage can result in a car’s value becoming less than the outstanding car finance secured on it. Gap insurance pays the difference between the car’s current value (what the insurer will pay in the event of theft or a write-off) and the outstanding car loan.
Speak to a Car Loan Expert
Speak to a car finance broker or expert about gap insurance before you buy it. You won’t need it if you’re happy with a like-for-like replacement in terms of age and condition. And if your car is less than 12 months old, your insurer will probably offer ‘new car replacement’ cover. This type of cover gives you a brand-new replacement car.
Getting expert advice on car finance, insurance and gap insurance before you sign on the dotted line could save you a significant amount of money over the term of your motor finance agreement.