Gap Insurance: Pcp Peace Of Mind?

GAP insurance is not a legal requirement, but it can be a useful form of protection for those who have a Personal Contract Purchase (PCP) agreement for their car.

GAP insurance covers the difference between the amount your car insurer will pay out in the event of your car being written off or stolen, and the original amount you paid for it or the amount you owe to a car finance company. This is particularly important for those with a PCP agreement, as the vehicle will lose value faster than you are paying off your debt to the finance company.

There are three main types of GAP insurance: 'Back to invoice', 'Vehicle replacement', and 'Contract hire'. GAP insurance is available from car dealerships, online brokers, or directly from insurers.

When is GAP insurance necessary?

GAP insurance is not a legal requirement and is optional. However, it is worth considering if you want to avoid being left with finance debt in the event that your car is stolen or written off.

When you want a brand new replacement car

If you want a brand new car to replace your old one in the event that it is written off or stolen, GAP insurance may be worth it. For example, if you pay £30,000 for a new car and 15 months later it's written off, your car insurer will pay out what the car is worth at that time, which may be significantly less. If you're not happy with this lower amount, GAP insurance may be worth it.

When you owe money to a car finance company

If you have taken out finance to buy the car – for example, a personal loan – and it is written off or stolen, GAP insurance will be useful. This is because your car insurer will pay out the value of the car at the time, but you're still left paying off the value it was when you first bought it. If you crash the car or it's stolen, you still have to pay back the whole loan. But if you had GAP cover, it would pay off the loan – meaning you're not left paying back money for a car you no longer have.

When you have a car under personal contract purchase (PCP)

If you have a car under PCP, then you will need personal contract hire GAP insurance. This will pay your outstanding contract hire agreement if your insurance payout is not enough to cover this.

When you have negative equity

Negative equity happens when you borrow more for a vehicle than it is worth. This can happen when you trade in a car, where the amount you owe on a loan is greater than the value of the car. This debt is then added to a new loan to purchase a new vehicle. You will need specific GAP insurance to cover this negative equity.

Types of GAP insurance

Return to Invoice Gap Insurance (RTI)

Return to Invoice Gap Insurance (RTI) is one of the most common types of GAP insurance. It covers the difference between the amount your motor insurer pays out and the original amount you paid for your car. This type of insurance is typically associated with new cars and must be purchased within a certain number of days of buying your car. Some providers will allow you to defer cover if you have new car replacement insurance.

Finance Gap Insurance

Finance Gap Insurance is designed for vehicles financed under a finance agreement other than a lease or contract hire agreement. It covers the shortfall between the market value of your car, covered by your motor insurer, and the outstanding balance on your finance agreement. This type of insurance is suitable for those who want to pay off any outstanding loan payments on their car if it is written off.

Combined Return to Invoice Gap Insurance

Combined Return to Invoice Gap Insurance offers the benefits of both Return to Invoice and Finance Gap Insurance. It covers the difference between your motor insurer's settlement and either the original amount you paid for your car or the outstanding balance on your finance agreement.

Vehicle Replacement Gap Insurance (VRI)

Vehicle Replacement Gap Insurance is the highest level of cover available from most insurance companies. It covers the difference between the settlement you receive from your motor insurer and the cost of a replacement new vehicle, even if the retail price has increased. This type of insurance is useful if you want to replace your car with a brand new model of the same age and specification.

Return to Value Gap Insurance (RTV)

Return to Value Gap Insurance is similar to Return to Invoice Gap Insurance but is based on the value of your car at the time of taking out the policy, rather than the original purchase price. It is suitable for those who have bought their car second-hand or have owned it for a long time.

How much does GAP insurance cost?

The cost of GAP insurance depends on the type and extent of cover you require. It is always worth shopping around to get the best deal. According to Forbes Advisor, the average cost of GAP insurance is $61 per year. However, this figure may not be applicable in the UK.

GAP insurance bought from a dealership is typically much more expensive than that purchased directly from an insurance company. Research by Money Saving Expert found that GAP insurance policies sold via dealerships were significantly pricier than those found online. For instance, a quote for a three-year GAP policy for a Seat Leon 1.5 TSI 130 Evo FR from a dealership was £375, while the same cover was available online for £120.

It is worth noting that GAP insurance is not essential. Your car insurer should already pay out for a replacement car of a similar age and condition. GAP insurance is only necessary if you want a brand-new replacement car or if you have a finance deal and would owe more to the finance company than you would get from the insurer.

How long does GAP insurance last?

GAP insurance is not necessary but can be a good idea in certain situations. If you have a Personal Contract Purchase (PCP) agreement, GAP insurance can protect you from being left with debt if your car is stolen or written off.

GAP insurance lasts for the length of the loan or lease when purchased from a dealership. When purchased from a standard car insurance company, it lasts for as long as it remains on the policy. Most drivers keep their policies active for a year or two.

GAP insurance is typically no longer necessary once the balance owed on a loan is less than the value of the vehicle. As depreciation slows down over time, the gap between car value and loan/lease balance eventually disappears as the driver pays off the car.

How to claim GAP insurance

The process of claiming GAP insurance can take several weeks and the exact timing depends on the circumstances of the incident. Here are the steps to follow:

Step 1: File a Claim

You can usually file a claim with your GAP insurance provider in person, over the phone, or online. This is done after your vehicle has been stolen or totaled, and your comprehensive car insurance or auto collision coverage claim has been approved.

Step 2: Provide Necessary Documents

When filing a claim, you will need to submit documentation showing the difference between what you owe on your loan or lease and the value of the car at the time of the incident. The specific documents requested may vary, but generally include:

• Insurance settlement statement
• Settlement check
• Loan or lease contract
• Loan history
• Police report
• Sales agreement

Step 3: Wait for Verification and Payout

Your vehicle insurance company will first determine the actual cash value of your vehicle. Then, your GAP insurance provider will verify your loan or lease details before releasing the payout.

It is important to note that GAP insurance covers only the scenario where you owe more on your loan or lease than the car is worth. It does not cover repairs, damage to another vehicle, negative equity from a previous loan, or additional charges related to your loan or lease.

Frequently asked questions