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What is GAP Insurance for a Car?
Guaranteed Asset Protection (GAP) insurance covers the amount you might be out of pocket on your car lease, finance plan or loan IF your car is stolen or written off (assuming you also have insurance covering the loss of your car through comprehensive/fire & theft). This amount (the "gap") is quantified as the difference between the value of your car when you first purchased it and its market value at the time of loss.
GAP protection is most useful for those who have used financing to purchase their cars and during the first few years of a car’s life, when depreciation rates are the highest. High depreciation leads to a significant “gap” between the purchase price and current price. We’ll take a look at who should consider GAP insurance in more detail below.
What is GAP Insurance?
Gap insurance comes into play when your car is stolen or written off. It covers the "gap" or shortfall between what your car insurance pays you for your stolen or written off car (the motor insurance settlement figure, which should be the current market value) and the amount of your car lease, finance plan or loan (which is usually higher than the market value)—so you're not out of pocket when you repay your car finance. This assumes you have the right kind of car insurance, of course.
Essentially, gap insurance covers the amount that your car has dropped in value since the day you bought it. Cars begin to depreciate in value as soon as they’re driven off the dealer’s forecourt; in fact the AA estimates that new cars can lose up to 40% of their value in the first year alone.
This depreciation is especially problematic for motorists who use financing to buy it. When you lease a car, you’re expected to return the car in good condition (or its agreed upon future value); if you borrow money for a car, you are expected to pay back the original value of the loan in a certain amount of time.
If, however, your car is stolen or written off during the course of the lease or loan, your car insurance company will only compensate you for the value of the car at the time of the damage or loss (if, that is, you’re covered for that particular loss or damage through a comprehensive or fire & theft policy). Given the depreciation effect, you’ll receive (far) less than the original cost of the car.
Your leasing or financing company, however, will be expecting you to pay for the full value of the car. That's where GAP insurance comes in.
Why Buy GAP insurance?
The “gap” is created because you owe more (to the bank or car company) than the car is actually worth—in other words, you have negative equity. Below we show you how a gap is created by crashing a car one year into a five-year, 3% interest loan, assuming 40% depreciation.
| What Does GAP Car Insurance Cover? | Loan Equal to the Car Purchase Price |
|---|---|
| Loan Amount (Car Purchase Price) | £25,000 |
| Car Value after 1 Year | £18,000 |
| Loan Remaining | £20,693 |
| Comprehensive Insurance Deductible | £1,000 |
| What Your Insurance Company Pays You (Current Value – Deductible) | £17,000 |
| Gap – What You Owe on the Loan | £3,693 |
In this example, you'd be out £3,700—an amount of money that many people would struggle to pay. Having gap insurance would cover this amount so you wouldn't be out of pocket. Those who take a loan for the entire cost of the car can suffer a large gap, like in the previous example.
When You Don't Need GAP Insurance
By taking out a smaller loan, and contributing a larger cash payment to the price of the car, you may not end up with a large gap to cover. In this case, you may decide not to pay up for GAP insurance:
| What Does GAP Car Insurance Cover? | Smaller Loan (Rest of Purchase Price Paid in Cash) |
|---|---|
| Car Purchase Price | £25,000 |
| Loan Amount | £10,000 |
| Car Value after 1 Year | £18,000 |
| Loan Remaining | £8,118 |
| Comprehensive Insurance Deductible | £1,000 |
| What Your Insurance Company Pays You (Current Value – Deductible) | £17,000 |
| Gap – What You Owe on the Loan | There is no gap—the insurance company pays you more than the remaining loan amount |
Here, with a smaller loan amount, you don't end up out of pocket if your car is written off or stolen. The car insurance policy pays you more than the amount you owe on the loan.
Should You Buy GAP Insurance?
When deciding if you should buy a GAP car insurance policy, there are a number of factors to consider.
You're More Likely to Have a Gap to Cover if...
- The bank loan is almost equal to the purchase price of the car
- In the case of a lease or other dealer financing, you've put down only a small initial deposit
- The car is valuable (potentially creating a larger gap)
With a larger down payment/cash payment, you're less likely to experience a gap.
If you're uncertain whether or not you should buy GAP insurance, you can do some simple math to help you decide, like in the examples above.
Who Doesn't Need GAP Insurance
If you've paid (mostly) cash for your car, you probably don't need GAP insurance. Why? Well, if your car was stolen or written off, you'll need a replacement car. A comprehensive policy should pay for the current market value of your car, which should equal the cost of a replacement car. So you use the insurance payment to buy a comparable car.
If you buy a used car, you probably don't need GAP insurance. Once a car is three year old, its value has probably depreciated by around 60% and the risk of a large gap has past. At this point, depreciation slows down and there won't be a big "gap" between a purchase price and current price. If you're buying a "new" used car - say one year old - GAP insurance may still be useful as you're still in the high depreciation zone.
Where Should You Buy GAP Insurance?
Your dealer may offer you GAP insurance when you buy your car. According to FCA rules introduced in September 2015, a dealer cannot introduce and sell you GAP insurance on the same day. This is to allow consumers time to shop around. Use this opportunity to do your research before signing—check with your car insurance company or another broker, as they may offer you a lower rate. If you're just starting to think about picking a car insurance company, check out our article on top, cheap UK car insurance companies.
FAQs
It depends. First, consider the value of your car. Our gap insurance example shows how a £25k car that depreciated 40% would have around a £3,600 "gap" after one year. Gap insurance covers this difference. If you can't afford to pay the amount of the gap, then gap insurance might be a good idea for you—assuming the price is right.
There are some companies that will sell gap insurance at any time. However, others will only sell cover for a recently-purchased vehicle. For example, Admiral only provides gap cover within 100 days of purchase.
After a car is stolen, your car insurance (assuming you have TPFT or comprehensive cover) will reimburse you for the current market value of the car. However, you'll usually owe more money to settle your car loan, finance or lease agreement. Gap insurance covers this difference so you're not out of pocket.
If you sell your vehicle mid-term, you'd cancel your gap insurance policy. Assuming you haven't made a claim, you'd typically get a pro-rata rebate of the unused premium. This balance could then either be refunded (less a cancellation fee) or some insurers will let you apply it against the cost of a new gap insurance policy on your next vehicle (then you might not pay a fee).