Somebody signs a car insurance document with a key fob and toy car on top of the paperwork

Gap Insurance Explained: What it is and do you need it?

Buying a new car can be incredibly daunting, especially when you’re buying a car on finance, and you can almost guarantee the salesperson opposite you will try and upsell you a whole host of possible upgrades and packages. One that will always come up, no matter who you’re buying through, is Gap insurance. But what exactly does that mean and is it really necessary? Let us guide you through all you need to know.

If you’re looking at buying a new car but need to offload yours first in order to get a deposit together, then you’ll find the easiest way to do so is by using Scrap Car Comparison’s industry leading service. No matter the condition of your car, or even if you have a van that won’t start, we’ll be able to get you the very best price no matter what thanks to our team of experts and nationwide network of specialist buyers.

What is gap insurance?

The “gap” in gap insurance is actually an acronym, standing for Guaranteed Asset Protection, and it serves as protection for you, the buyer, in the event your car is written off during the course of your finance agreement for your car.

Gap insurance can be broken down into six different types:

  • Return to invoice Gap insurance: will top up a ‘total loss’ payment to the amount you paid for the car
  • Return to value Gap insurance: will pay the difference between a standard ‘total loss’ payment and the value of the car when you made the original purchase
  • Vehicle replacement Gap insurance: will pay the difference between a standard ‘total loss’ and the value of a new car
  • Finance Gap insurance: will cover any outstanding loan payments but may not include any negative equity
  • Negative equity Gap insurance: will cover the extra costs incurred in a finance deal when borrowing more money than the cost of the car
  • Lease Gap insurance: will pay out the rest of your contract, including any extra fees due to ending your agreement early 

How does gap insurance work?

Gap insurance covers you in the event of your car being written off or stolen before you’ve finished paying off your finance agreement. This is necessary because of the rate at which cars depreciate after being purchased, especially if new. How quickly do cars depreciate, I hear you ask? Very quickly. Between 15% and 30% every year, and up to 50% over a three year period.

So, if you’ve bought a car for, say, £22,000 on finance, and just two weeks later your car is written off or stolen, your insurers may well only pay out £18,000, because your car will have lost that much value that quickly. This will leave you with a shortfall to your finance provider to the tune of £4,000. Gap insurance will cover that shortfall to ensure you are able to pay the right amount back to your finance provider.

What does gap insurance cover?  

Gap insurance covers the difference, or – hence the name – gap, between the amount your insurer pays out after a total loss and the outstanding value on your specific finance deal. There is a wide variety of different gap insurances (which we have covered further up in this article) which all have specific elements they will cover in the event of a total loss.

When do I need to buy gap insurance?

You will need to buy gap insurance if you want to ensure that, in the event of an accident or your car being stolen, you are able to replace it with a brand new car, otherwise you may find that you have to buy something a little “less new” when finding your replacement. You may also find that it’s a useful cover to have if you have a finance deal – whether with the manufacturer or a personal loan – as it ensures that you are able to pay out the last part of your agreement.

Is gap insurance worth it

Like with many insurance policies, it’s impossible to say whether it’s worth it for you or not until you actually find yourself in a position to need it. If you don’t think you’re ever going to be in a position where you’ll need to cover that gap, then you could save yourself the monthly payments, but you’ll need to be certain you’ll be able to cover the lump sum. For the most part, if you’ve bought a car on finance, then gap insurance is one of those things that may seem like another monthly payment that’s a little frustrating, but it could save you a massive headache in the long run.

How much is gap insurance 

The amount your gap insurance will cost you will vary immensely depending on the car you’re buying, the amount of deposit you initially put down and the length of your deal. However, one of the biggest tips that money saving experts will tell you is to shop around – and particularly avoid buying your policy directly from the dealership you bought the car from. This is because dealers often put a huge premium on their prices compared to shopping around – for example, the average offer from car dealers on a £10,000 car would be £325 for a single year or £375 for three years’ cover, whilst a policy from an independent company could cost just £54 and £120 for the same levels and duration. 

Do I need gap insurance on a lease?

While it isn’t a necessity to have gap insurance on a lease car, it is highly recommended. In the event of a ‘total loss’ incident – either an accident that writes the car off or it is stolen – then your insurers are only going to pay out the value of the car at the time of the accident. Due to the rate at which cars depreciate, this is going to be considerably less than you originally paid for the car, so you will have to find that amount to be able to pay off the remaining amount on your lease agreement. Gap insurance will fill that shortfall, meaning you’re not landed in potentially thousands of pounds worth of debt.

When does gap insurance not pay

Your gap insurance will only pay out in the event your car is declared a total loss – which means it’s either been written off or stolen. Any other incidents or insurance claims will not qualify for a gap insurance payout. You will also need to have fully comprehensive insurance, as the gap insurers will not pay out if you only have third party cover.

Can you still get gap insurance any time? 

Gap insurance can be purchased at any time when you own a car on a finance agreement – in fact, you cannot be sold insurance as part of a car purchase, following pushy salespeople pressuring customers into taking out policies. There must be at least two days between the date you are given the cover quote and the day that you buy it. There is no requirement for these to be taken out on new cars, either, and you can absolutely take out gap insurance on a second hand car if you feel the need to.

Do I have to buy gap insurance from the dealer?  

While it may seem easier to buy your gap insurance from the dealer that you buy the car from, just be warned that you could be paying considerably more by not shopping elsewhere. On average, car dealers will charge you at least four times as much for gap insurance than you’d find if you shopped around, so it’s worth keeping your options open before you sign on the dotted line with your dealer.

Do I need gap insurance on a PCP car

If you’re buying a brand new car on a PCP deal, then you may not need to get Gap insurance as most fully comprehensive insurance policies offer a ‘new car replacement’ in the first 12 months of a car’s life – sometimes extending to 24 months – meaning you don’t need to worry about gap insurance for that period of time. However, if your PCP deal extends beyond this period, then gap insurance will cover you in that latter part of your agreement and ensure you’re not landed in finance debt.

Can you get a refund on unused gap insurance

If you cancel your gap insurance before the end of your policy then you will be able to claim a refund for any time remaining on the agreement. However, if you get to the end of your insurance policy and haven’t used it, then you will not be eligible for any refunds. While you may not have needed it in the end, you were still covered and were paying for that benefit.

Can you transfer gap insurance

Most gap insurance policies will require you to state how long you expect to own the car for (which can be difficult to predict at times), so many brokers will allow you to transfer the remaining portion of your deal over to a new vehicle should you change wheels sooner than you thought. 

If you’re hoping to buy a new car soon and are looking to put forward a slightly better deposit, then why not scrap that tired old car sitting in your driveway gathering dust?  With Scrap Car Comparison, all you need to do is make one phone call, or use our online quote generator, to find out just how much your old car or van could be worth.

We work with Authorised Treatment Facilities around the country, meaning your car will always be disposed of and recycled in line with all regulations, and with a nationwide network of collection agents covering 99% of the country, we’ll even throw in free collection. So get started today and before you know it your troubled wheels will finally be a thing of the past.

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