What Is Gap Insurance and Do You Need It?
Just imagine, you finally get the car you’ve been dreaming of, everything is perfect… and then, something goes wrong and the car is written off entirely. The insurance will compensate you, but only for the value of the car at the time it was written off, and considering the depreciation rate of cars, you risk being in negative equity. GAP insurance (or financial shortfall insurance) stands for Guaranteed Asset Protection and will prevent you from losing money if the worst was to happen.
GAP insurance can be quite confusing and it’s hard to know if you really need it, which is why we’re here to fill you in on all that there is to know about it.
What is Gap Insurance?
When buying a new or nearly new car, the buyer risks losing money because of depreciation. A new car can lose up to 60% of its value within the first 3 years of owning it. If your vehicle is stolen or repairing it is deemed not possible, you stand to lose a lot of money if you are only compensated for its current value, rather than its initial value. GAP Insurance protects you from this shortfall caused by depreciation and will generally bridge the gap between the maximum amount that your insurer will pay and what the original value of the car was.
The Different Types of Gap Insurance
There are several different types of GAP insurance and finding the right one for you is important. It can be a little confusing to know which policy best suits you and your car, so don’t be rushed into buying anything.
There are three main types of schemes and all of them effectively top up your maximum insurance pay out.
1. Return to Invoice
This type of policy refers to the price that you originally paid for the car. This will cover the difference between the maximum your insurer will pay out and what you initially paid, which might not have been the original value of the car. This can end up being the cheaper GAP policy for those buying nearly new cars as they are likely to have paid a depreciation value, significantly less than the original market value.
2. Return to Value
This type of policy refers to the original value of a car, before depreciation. In this case, GAP insurance covers the difference between the maximum that the insurer pays out and the original value of the car. This is likely to be a more expensive policy, especially if you are buying the car second-hand and have paid a depreciation value.
3. Vehicle Replacement Cover
This policy refers to the cost of a replacement vehicle. It covers the difference between the insurer’s maximum payout and the cost of a replacement vehicle that is the same make, model and specification, even if the cost is more than you originally paid. This can also create a more expensive policy, depending on the car.
Reasons to get GAP Insurance
GAP insurance might not be for everybody as it’s not generally offered for older cars that don’t suffer from depreciation as much, but those with new or nearly new cars stand to benefit greatly from it. There are a few reasons why it’s worth looking in to.
To Avoid Owing More Than the Car is Worth
If the car is written off as a total loss, you could end up owing more than it’s worth because of finance repayments. Ideally, insurance should provide you with enough money to be able to pay off the rest of the debt, but because of depreciation, this isn’t always the case. This can happen because of high-interest rates, a quick depreciation rate, you’re paying it off slowly or because you have a big ‘balloon’ payment still left to pay. This can mean that you’re still paying for a car which you no longer own, just because the car was less valuable than when you originally bought it.
You Cannot Afford to Replace Your Car
Even if you fully own the car with no finance repayments left, or if an insurance pay-out gives you enough to pay off your financial repayments, that doesn’t necessarily mean you can afford to replace the car. In this sense, you have lost money because the car did not last as long as you had intended. GAP insurance should leave you with a big enough sum of money to replace your car comfortably.
Don’t Lose Out – Protect Yourself with GAP Insurance
No one can predict the future and say for sure that nothing will happen to your car. Not only would your car being completely written off cause a huge inconvenience to your life, but it could also potentially drain your bank account, and you shouldn’t have to suffer because of depreciation. If you’re spending a significant amount of money on a car, be sure to enquire about GAP insurance and whether it would be beneficial for you.
Take a look at our Financial Shortfall Insurance here (GAP insurance) to find out more.
At Bellamys we help our customers in every way we can, and our friendly sales team are always on hand to answer any question. Get in touch here or search our used and nearly new cars here and start your car buy journey.