With over 75% of new cars in the UK bought on finance, the need for Guaranteed Asset Protection (GAP) insurance is growing but many drivers could be paying well over the odds for it. Most people don’t realise that GAP insurance can also be taken out on used cars too!
GAP insurance is used to cover the difference between an insurance pay out and the replacement value ofthe car. It’s available for cars and vans purchased outright as well as cars purchased on finance, hire purchase or leased. It is also possible that without GAP insurance if you buy on finance or lease, the insurance settlement may not cover the outstanding payments to the finance or lease company.
According to the AA, the average new car will only be worth around 40% of its original price after three years, based on the owner driving 10,000 miles a year. That means it will have lost around 60% of its value at an average of 20% per year.
Of course, the actual amount your car depreciates in value will depend on the make and model, but it’s safe to say that the vast majority of cars will lose a significant amount of their value over a few years.
The problem this causes is that, if your car is written off or stolen and you want to go out and buy a car that is similar to the one you bought a few years ago, you will have no choice but to make up the difference yourself.
This is where GAP insurance can prove invaluable: it bridges the gap between the price you paid at the outset and the amount you receive from your insurer.
GAP insurance is a cost-effective way to protect your finances. It’s often cheaper to buy cover independently rather than through a car dealership, as there aren’t any showroom overheads or commissions to pay.
There’s a good reason for this. When you buy GAP insurance from a car dealer it will include 20% Insurance Premium Tax; via a broker policy is only 9.5%.
As an example, Mr A purchases his new car for £15,000 after a claim the car is written off and the insurers offer a settlement of only £11,000. Fortunately Mr A had taken out GAP Insurance and the benefit of this cover paid Mr A £4,000 being the difference between the insurers payment and the original purchase price.
Without GAP insurance you could end up having to keep paying the finance company for a car you can no longer use. So GAP insurance does make sense!