Everything you need to know about GAP insurance

It’s exciting to get a new car, with its fresh interior and the promise of new adventures. But along with the excitement comes important financial decisions, and one that’s often overlooked is Guaranteed Asset Protection (GAP) insurance.

You might have heard of it, perhaps briefly mentioned by a car dealership. While it might seem like just another add-on, understanding GAP insurance and how to purchase it wisely could save you a substantial amount of money if your car is written off or stolen.

This guide will walk you through what you need to know about purchasing GAP insurance, so you can make an informed decision and protect your finances.

What is GAP Insurance?

Let’s start with the basics. Imagine you buy a new car for £30,000. If it’s stolen or written off six months later, your standard comprehensive car insurance policy will typically pay out the car’s current market value, not what you originally paid.

Due to depreciation, that £30,000 car might only be worth £22,000. If you still owe £28,000 on your car loan, you’re left with a £6,000 shortfall (£28,000 loan – £22,000 insurance payout). This is often called negative equity.

GAP insurance bridges this gap. It covers the difference between your car’s market value (what your standard insurer pays) and either the original purchase price or the outstanding finance balance, depending on your policy.

Why consider GAP insurance?

While it’s an additional cost, GAP insurance offers crucial financial protection, especially if:

• You’ve bought a new car, as new cars depreciate quickly.
• You have a long finance agreement, which increases the likelihood of a shortfall.
• You’ve paid a small or no deposit, meaning a larger initial loan.
• You’ve rolled negative equity from a previous car into your new finance deal.
• You’re leasing a car, as many lease agreements hold you responsible for any difference if the car is written off.

Types of GAP insurance

Before you buy, it’s essential to understand the different types of GAP insurance available:

1. Return to Invoice (RTI) GAP Insurance: This common type pays the difference between your comprehensive insurer’s payout and the original invoice price you paid for the vehicle.
2. Return to Value (RTV) GAP Insurance: Similar to RTI, but it covers the difference up to the Glass’s Guide retail value of your vehicle when you originally purchased it. This is often used for used cars where an invoice price might be less relevant.
3. Vehicle Replacement Plus (VRP) GAP Insurance: This aims to get you into a brand new, equivalent replacement vehicle. It covers the difference between your insurer’s payout and the cost of replacing your vehicle with a new one (even if the price has increased).
4. Finance GAP Insurance: Designed for financed vehicles, this covers the difference between your insurer’s payout and the outstanding balance on your finance agreement.
5. Lease GAP Insurance: Tailored for leased vehicles, this covers the difference between your insurer’s payout and the remaining payments and any early termination fees on your lease agreement.

Where to Purchase GAP Insurance

You have a few options when buying GAP insurance, each with its pros and cons:

1. Car dealership:

• Pros: Convenient, can be arranged at the point of sale.
• Cons: Often the most expensive option, limited providers, and potential for pressure selling.

2. Independent insurance brokers/specialist GAP insurance providers:

• Pros: Usually much more competitive prices, wider range of policies, unbiased advice, and tailored policies.
• Cons: Requires more research and a separate transaction after your car purchase.

3. Your car insurance provider:

• Pros: Some mainstream insurers offer GAP as an add-on, which can be convenient.
• Cons: Not all do, and their offerings might not be as comprehensive or competitive as specialist providers.

Your step-by-step guide to purchasing GAP insurance

1. Understand your needs

• How much did you pay for the car (or what’s its current value)?
• What is your outstanding finance balance?
• Are you buying new, used, or leasing?

    Knowing these figures will help you determine the most suitable type of GAP insurance.

2. Do your research

• Don’t buy at the dealership on the spot. UK regulations include a deferred opt-in period, meaning a dealership cannot sell you GAP insurance on the same day you agree to buy your car. Take advantage of this time.
• Get quotes from several independent GAP insurance providers online. Compare their policy terms, coverage limits, and pricing.
• Read reviews of the providers.

3. Compare policies, not just price

• Policy term: Does it cover the full length of your finance agreement or lease?
• Maximum payout: Is it enough to cover your potential shortfall?
• Exclusions: Are there any circumstances where the policy won’t pay out? Common exclusions include vehicles used for hire or reward, pre-existing damage not repaired, or exceeding mileage limits.
• Excess: Is there an excess on the GAP policy itself?
• Transferability: If you sell your car, can the policy be transferred to the new owner, or can you get a pro-rata refund?

4. Read the small print

Before committing, thoroughly read the policy wording document. If anything is unclear, contact the provider for clarification.

5. Purchase your policy

Once you’ve found the right policy at a competitive price, purchase it directly from the provider. Many can be bought online within minutes.

Key considerations before you buy

• Cost vs. benefit: While an extra expense, consider the potential financial burden of being left with substantial debt and no car.
• Free cover from the dealership: Some dealerships offer free GAP insurance for a short period (e.g., 12 months). This is a nice bonus, but remember it’s typically limited, and you’ll still need to consider your options for longer-term coverage.
• Your personal circumstances: If you’re paying cash for an older, low-value used car, GAP insurance is unlikely to be necessary. It’s most relevant for new or nearly new vehicles with significant financing.

GAP insurance might not be the most glamorous part of buying a car, but it’s undoubtedly one of the most practical. Taking the time to understand your options and shop around can save you from a potentially crippling financial burden should the unexpected happen. Drive away with confidence, knowing you’re fully protected.

Speak to Protect Your Family today to understand your options and secure the peace of mind you deserve. GAP insurance is a small investment that can provide significant financial security, ensuring that an unfortunate event doesn’t leave you in a deep financial hole.