This can happen when you buy or lease a new car, because your motor insurance will usually only cover you up to the value of the vehicle at the time when the claim is made; but, due to depreciation, the amount outstanding on the vehicle could total more than that figure.
It doesn’t matter whether the accident was your fault or not, this shortfall will still have to be made up either from savings or by refinancing the debt. In these circumstances you may be liable to pay the outstanding amount and also have no replacement vehicle.
How does GAP Insurance work?
As you will no doubt be aware, vehicles depreciate in value very quickly during their first few years on the road; that’s one of the reasons why leasing can offer such great value on new cars. However, if the vehicle is written off early on in your agreement there could well be a shortfall to pay.
For example:
- A motorist takes out a lease on a Volkswagen Golf worth £24,000 with a monthly repayment of £200 over 4 years with an initial deposit of £1,200.
- After 2 years the car is stolen and the insurance company pays you £16,000 based on the market value at the time of loss.
- Your finance company then sends you a settlement figure of £18,500. This means you are left owing £2,500 to settle the finance.
|
Initial Value |
Market value after 2 years |
Finance outstanding |
Shortfall |
|
£24,000 |
£16,000 |
£18,500 |
2,500 |
As you can see, without GAP Insurance in this case the motorist would be left paying the £2,500 shortfall out of their own pocket for a vehicle that they can’t even use. GAP Insurance is there to make up the difference so that any outstanding finance can be settled and the motorist can get back on the road.
The exact cover levels of GAP Insurance can vary from provider to provider. In the example given, our partnered provider, Look After My Car,will also cover the initial deposit you paid so you can order a new car quicker
Do I need GAP Insurance?
Whilst GAP Insurance is not compulsory, you should consider it in the following cases:
- You will need to replace your vehicle if it’s written off: If, in the event of your vehicle being written off, you will need to replace it quickly. This could be difficult unless you have the funds already in place. A GAP Insurance policy would protect you from having to find extra funds and get you back on the road as soon as possible.
- You paid a small initial rental: The shortfall in the event of a motor insurance write off could be greater if you choose to make a small initial rental as there is a greater number of outstanding payments. Choosing GAP insurance in these circumstances would protect against having to pay a large shortfall to cover the settlement costs.
- You have had dealer fitted accessories added: Any extras fitted to the vehicle at point of order will also depreciate as the car does, affecting the motor insurance pay out. A GAP Insurance policy will factor the invoice price of these items into the shortfall calculation.
- You have an excess to pay on your motor insurance: If the car is written off you will likely have an excess to pay, however in most cases GAP Insurance will cover all or most of this payment.
Will gap insurance replace my car?
GAP Insurance will not replace your vehicle in the event that it is written off. However, it will help you settle the gap between the motor insurance pay out and the outstanding finance quickly so that you can get back on the road relatively hassle free.
Find out more about our GAP Insurance product here.
