Shortfall Insurance: Vehicle Depreciation Protection

Guaranteed Asset Protection (GAP) insurance, also known as vehicle shortfall insurance, covers the difference between the current market value of a vehicle and the amount initially paid for it in the event of a total loss or write-off. This type of insurance is particularly relevant for new cars, which can lose up to 40% of their value in the first year and 60% in the first three years, according to the AA. GAP insurance provides financial peace of mind, ensuring that policyholders can purchase a brand-new replacement vehicle without incurring additional costs. It is available for cars, vans, motorbikes, and motorhomes, and can be purchased from dealerships or specialist brokers.

What is GAP insurance?

Guaranteed Asset Protection (GAP) insurance is an optional product that covers the difference between the amount you owe on your auto loan and the amount your insurance company pays out if your car is stolen, damaged beyond repair, or written off.

Standard auto insurance policies cover the depreciated value of a car, which is the current market value of the vehicle at the time of the claim. This value can be significantly less than the original purchase price, as new cars can lose up to 40% of their value in the first year of ownership, and this depreciation continues over time.

If your vehicle is written off, GAP insurance will cover the difference between the price you paid for the vehicle and its current market value, enabling you to purchase a brand-new replacement vehicle without incurring additional costs. This is particularly relevant if you have taken out a loan to buy your vehicle, as you may otherwise be left with outstanding payments on a car you no longer have.

There are several types of GAP insurance policies, including Return to Invoice Cover, Agreed Value Cover, Contract Hire GAP, and Vehicle Replacement Cover. These policies can be purchased for new or used vehicles, although the benefits for used vehicles may be smaller as they depreciate more slowly. GAP insurance is typically associated with new cars, as they depreciate much faster than used vehicles.

When deciding whether to purchase GAP insurance, it is important to consider your individual circumstances and the terms of your auto loan and standard insurance policy. GAP insurance may be a valuable addition if you are concerned about being able to afford a new car if your current vehicle is written off, or if you want to ensure you are not stuck paying for a vehicle you no longer have.

When do you need it?

Vehicle shortfall insurance, also known as credit shortfall, gap insurance, top-up insurance, or guaranteed auto protection, is a valuable form of cover that can help you if your car is stolen or written off. It covers the difference between your car's retail value and the amount you still owe on your loan.

• You are financing your car: If you are still paying off your car loan, vehicle shortfall insurance can provide peace of mind. In the event that your car is stolen or written off, you won't have to keep paying for a car that you no longer own. This is especially important if you have a long payoff period remaining.
• You have bought a brand-new car: New cars depreciate quickly, often losing 15-20% of their value in the first year and up to 50% after five years. If your new car is written off or stolen, the insurance payout may not cover the remaining loan amount. Vehicle shortfall insurance would cover this difference, so you don't have to pay out of pocket.
• You made a small down payment or no down payment: If you put no money down or made a small down payment on your car, you may owe more than the car's current value. In this case, vehicle shortfall insurance can protect you from financial loss.
• You have a long loan payoff period: If you chose a long payoff period for your car loan, you may owe more than the car's current value for a significant portion of the loan term. Vehicle shortfall insurance can cover this gap and protect you from financial loss.
• You have negative equity from a previous car loan: If you rolled over negative equity from an old car loan into your new loan, you may benefit from vehicle shortfall insurance. This insurance can protect you if the new vehicle is declared a total loss.
• You are leasing a vehicle: Gap insurance is generally required for a lease. It can protect you if the leased vehicle is stolen or written off and the insurance payout doesn't cover the remaining lease amount.
• You are buying a vehicle that depreciates quickly: Some vehicles, such as luxury sedans or SUVs, may depreciate faster than the average car. If you are financing or leasing one of these vehicles, your lender may require you to have vehicle shortfall insurance. This insurance can protect you if the car is declared a total loss.

In summary, vehicle shortfall insurance is worth considering if you want to protect yourself financially in the event that your car is stolen or written off. It is particularly relevant if you are financing or leasing a vehicle, made a small down payment, have a long payoff period, or are buying a vehicle that depreciates quickly.

When do you not need it?

Vehicle shortfall insurance, also known as credit shortfall insurance, gap cover, or top-up cover, is a type of insurance that covers the difference between the amount your comprehensive car insurance pays out and the amount you still owe to the bank if your car is stolen or written off. This type of insurance is particularly useful if you are still paying off your car, as the payout from your insurance is often less than what you owe to the bank.

• You Own Your Car Outright: If you fully own your car and do not owe any money to the bank or a financial institution, there is no need for vehicle shortfall insurance. In this case, the payout from your comprehensive insurance should be sufficient to cover the cost of repairs or replacement.
• You Have Alternative Coverage: In some cases, you may already have coverage for the shortfall amount through other means. For example, if you have savings or alternative insurance that can cover the difference between the insurance payout and the amount you owe, then additional shortfall insurance may be unnecessary.
• You Have a Short-Term Loan: If your car loan is short-term and you are close to paying it off, the risk of a significant shortfall may be lower. However, it is still important to consider the potential depreciation of your car's value compared to the remaining loan amount.
• You Have a Low-Interest Loan: If your car loan has a low-interest rate, the principal amount owed is likely to decrease at a faster rate. This reduces the risk of a substantial shortfall, and you may not need additional shortfall insurance.
• You Have a Large Down Payment: If you made a large down payment when purchasing your car, the gap between the insurance payout and the amount owed may be smaller. In this case, you may be comfortable covering any potential shortfall yourself without the need for additional insurance.
• You Have a Short Repayment Period: If you have a short repayment period for your car loan, such as less than two years, the risk of a significant shortfall decreases. A shorter repayment period means that the loan amount decreases faster, reducing the potential gap between the insurance payout and the amount owed.

It is important to carefully consider your financial situation, the terms of your car loan, and the potential depreciation of your vehicle's value when deciding whether or not to opt for vehicle shortfall insurance. Each person's circumstances are unique, and it is always a good idea to consult with a financial advisor or insurance professional to determine the best course of action for your specific situation.

How much does it cost?

The cost of vehicle shortfall insurance, also known as Guaranteed Asset Protection (GAP) insurance, depends on several factors.

Firstly, the value of your vehicle will affect the price of your premium. The make, model, and age of your car will determine the cost of your insurance, with more expensive vehicles resulting in higher premiums.

Secondly, the length of your finance agreement and policy will influence the price. The longer you require the policy to be in place, the more it will cost.

Thirdly, the type of policy you opt for will impact the price. There are several types of GAP insurance policies available, including Return to Invoice Cover, Agreed Value Cover, Contract Hire GAP, Finance GAP, and Vehicle Replacement. The cost will vary depending on which type you choose.

Additionally, some providers may offer add-ons and optional extras to your GAP insurance policy, such as scratch and dent insurance and tyre and alloy wheel insurance. These add-ons will increase the overall cost of your insurance.

It is worth noting that you can usually pay your GAP insurance premiums in monthly instalments, spreading the cost over a more extended period.

When considering the cost of vehicle shortfall insurance, it is important to shop around and compare quotes from different providers to ensure you get the best value for your needs.

What does it cover?

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 amount you paid for it or the amount you owe to a car finance company.

There are three main types of GAP insurance:

• 'Back to invoice' GAP insurance: This covers the difference between what 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.
• 'Vehicle replacement' GAP insurance: This covers the difference between what the insurer will pay you and what you would pay if you bought the car today brand new, or if it was a used car, how much it was when you originally bought it.
• 'Contract hire' GAP insurance: This is only available for those who lease their car with no option to buy it. The current market value of the car will be covered by your car insurer and the GAP cover will pay any remaining payments owed on the lease.

GAP insurance will also cover you if your car is stolen.

It is worth noting that GAP insurance is not designed to cover older or relatively inexpensive vehicles as their rate of depreciation is relatively low.

Additionally, GAP insurance has several exclusions. It will not cover you if you only have third-party car insurance, and it will only pay out if your car is stolen or a total write-off, as judged by the insurance company. It will also not cover any deductions made by your car insurance company or any non-standard extras that you added to the car after purchase.

Frequently asked questions