If something happens to your vehicle—such as an accident or theft—you could find yourself in a situation where the insurance payout doesn’t fully cover what you still owe on the finance agreement. This is where gap insurance comes in.
How does gap insurance work?
Gap insurance, or Guaranteed Asset Protection, is designed to cover the difference between what your car insurer pays out and the amount still owed on your finance agreement. Standard car insurance policies usually cover the current market value of a vehicle, which may be much lower than what you originally paid.
For example, if your car is stolen or written off, your insurer might pay out the market value at that time, which could be significantly lower than what you owe. This could leave you with a financial shortfall that you must pay out of pocket. Gap insurance steps in to cover this amount, helping you avoid unexpected costs.
Different types of gap insurance
There are several types of gap insurance policies, each designed for different situations.
- Finance gap insurance: Covers the difference between your insurance payout and the remaining finance balance.
- Return-to-invoice gap insurance: Pays the shortfall between your insurer’s payout and the original purchase price of the vehicle.
- Return-to-value gap insurance: Similar to return-to-invoice but based on the car’s value at the time you bought the policy, rather than the original purchase price.
- Lease gap insurance: Designed for those who lease a car, covering outstanding rental payments if the vehicle is written off.
Do you need gap insurance?
Gap insurance isn’t mandatory, but it can be beneficial depending on your circumstances. If you purchased a brand-new car, it is likely to lose value quickly. Some vehicles depreciate by as much as 20-30% in the first year alone. If you financed most of your purchase, you may find yourself owing more than the car’s actual value early on.
On the other hand, if you put down a large deposit or are near the end of your finance agreement, the risk of a shortfall is much lower. In these cases, gap insurance may not be necessary.
Where can you buy gap insurance?
Gap insurance is often offered by car dealerships when you take out a finance agreement. However, these policies can sometimes be more expensive than those available from independent insurers. It’s always worth shopping around to compare prices and find the best deal.
Before purchasing, check whether your car insurance policy already includes cover for financial shortfalls. Some comprehensive insurance policies offer a new-for-old replacement in the first year, which may make additional cover unnecessary.
Gap insurance provides financial protection if your car is written off or stolen while you’re still paying for it. Without it, you could be left covering the remaining finance out of your own pocket.
While not essential for everyone, it can be a valuable safety net if your car is likely to lose value quickly or if you have a large outstanding balance. Comparing different policies and providers ensures you get the right level of cover at the best price.
