If you own a car, you’ll have car insurance to protect yourself from accidents, theft, or vandalism. But did you know that your car insurance may not cover the full value of your car if it is written off?
Most car insurance policies pay out based on the current market value of your car, not the amount you paid for it. And cars tend to lose value over time, especially new or nearly new ones.
So if your car is stolen or damaged beyond repair, you may end up owing more money than your insurance pays out. For example, if you bought a car for £20,000 and it is written off after two years, your insurance may only pay out £12,000, based on the depreciation of your car. But if you still owe £15,000 on your loan or finance agreement, you will have to pay the difference of £3,000 out of your own pocket.
Finance agreements typically front load the interest payments, so for the earlier repayments, more goes towards interest costs rather than paying off the principle debt.
This is where GAP insurance comes in. GAP stands for Guaranteed Asset Protection, and it is a type of insurance that covers the gap between the market value of your car and the amount you paid for it, or the amount you owe on it, whichever is higher.
GAP insurance can help you avoid losing money if your car is written off. It can also help you replace your car with a similar model without having to pay extra fees or charges.
There are different types of GAP insurance policies available, depending on your needs and preferences. Some of the most common ones are:
- Return to invoice (RTI) GAP insurance: This covers the difference between the market value of your car and the original invoice price you paid for it.
- Return to value (RTV) GAP insurance: This covers the difference between the market value of your car and the value of your car when you bought the policy.
- Vehicle replacement (VRI) GAP insurance: This covers the difference between the market value of your car and the cost of buying a new car of the same make, model, and specification.
- Finance GAP insurance: This covers the difference between the market value of your car and the outstanding balance on your loan or finance agreement.
GAP insurance is not mandatory, but it can be useful in some situations. For example, if you:
- Bought a new or nearly new car that depreciates quickly
- Have a long-term loan or finance agreement that exceeds the value of your car
- Want to protect yourself from paying extra fees or charges if your car is written off
- Want peace of mind that you can replace your car with a similar model if something happens to it
However, GAP insurance is not for everyone. You may not need it if you:
- Bought a used car that does not lose value quickly because the initial reduction has already occurred
- Paid for your car in full or have a short-term loan or finance agreement that matches the value of your car
- Have enough savings or income to cover the gap if your car is written off
- Are happy to buy a cheaper or older car if something happens to yours
Before buying GAP insurance, you should also compare the cost and benefits of different policies from different providers. Some factors to consider are:
- The price and duration of the policy
- The level and type of cover provided
- The exclusions and limitations of the policy
- The claims process and customer service of the provider
GAP insurance can be a smart way to protect yourself and your car from unexpected events. But it is not a one-size-fits-all solution. Weigh up the pros and cons of GAP insurance and shop around for the best deal before buying one, and do ask for a quotation if you want to check out what we can do for you.