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Can I Get GAP Insurance on a Bank Loan?
When buying a car, the purchase can be financed in many ways. Some of these can be sourced through the car dealership, like hire purchase or personal contract purchase. An alternative source of funding is getting a personal loan through a bank.
On the face of it, there may not be too much to choose between them, but some differences can impact both your financial protections and options and your choices for GAP Insurance coverage.
The bottom line is you can still get GAP Insurance if you take out a bank loan, but a few things must be understood first.
Dealer finance vs Personal/Bank Loan
GAP Insurance options with a bank or personal loan
How GAP Insurance works on a bank loan
Dealer finance vs Personal/Bank Loan
Dealer finance
Hire Purchase and Personal Contract Purchase are forms of retail finance that are closely related. 
These are available for new and used cars.
The vehicle does not become the borrower's property until the HP or PCP agreement is paid off in full.
The key to these types of finance is that they are linked to the purchased vehicle. If the customer defaults on the car loan, the finance company can look to recover the vehicle.
Additionally, the outstanding finance settlement must be paid if the vehicle is written off.
Personal Loan or a Bank Loan
A bank loan is generally tied to the person applying for it, not the car. This means that if the customer defaults, then the bank will look to redress the situation with the customer, not repossess the vehicle.
As the vehicle is not linked to the loan, the borrower owns the car outright from the beginning.
Another key difference is that if the car is written off, the outstanding loan payments can continue to be paid each month. The whole settlement does not need to be paid.
GAP Insurance options with a bank or personal loan
If you look to buy GAP Insurance cover, a bank loan is almost considered a 'cash buy' as the loan is not linked to the vehicle. This means that the choice of GAP Insurance policies would be the same as for an outright vehicle purchase, namely:
- Return to Invoice GAP Insurance - to cover between the car insurance settlement and the original invoice price you're paid.
- Vehicle Replacement GAP Insurance - to cover between the car insurance settlement and the cost of the equivalent replacement vehicle
Of all the types of GAP insurance available for PCP and HP, the one not available for a bank loan is Finance GAP insurance. This is because the loan is not linked to the vehicle, so there can be no financial shortfall between the market value settlement from the car insurance provider and the loan settlement.
To clarify, the GAP Insurance you take is not directly against the bank loan. However, it does provide you with financial protection that can incorporate cover against the bank loan liability.
How GAP Insurance works on a bank loan
As mentioned above, taking out GAP Insurance and funding the vehicle via a bank loan is considered like a cash purchase.
So, for example, let's say you buy a brand-new car for £25,000.
You secure the purchase via a bank loan for the total purchase price of £25,000. You will make monthly payments over 60 months of £500.
You look at the different types of GAP insurance and decide to buy Return to Invoice cover for four years. The GAP Insurance cost is £210.
Two years later, the vehicle is stolen. Your car insurance provider writes off the vehicle and pays you the current market value at that time. The motor insurer pays £17,000 in settlement.
Your bank loan settlement is £20,000.
GAP Insurance Settlement
The Return to Invoice GAP policy will pay the difference between the motor insurance company settlement of £17,000 and the original price you paid for the vehicle of £25,000.
At this time, armed with £25,000, you have a choice.
You can use the full £25,000 settlement and buy a brand-new replacement vehicle. You can continue paying the outstanding payments on your bank loan until the 5-year term has finished.
Alternatively, you can pay off the £20,000 on your car loan and use the remaining £5,000 in any way you like.
Is GAP Insurance worth it on a bank loan?
The same arguments exist for guaranteed asset protection on a bank loan as for dealer finance. The only slight mitigation is that with a bank loan, you will not be asked to pay off the loan immediately like you would for HP, PCP or a lease contract.
The fact that you do not have to pay off a bank loan immediately following a write-off does not make the personal loan disappear. You could still be left where you owe more on the loan settlement than the vehicle is worth.
If you are considering what GAP Insurance offers, then you need to think about all the reasons why cover can help you. This way, you can decide whether buying GAP insurance suits you.
Key reasons why GAP Insurance comes into play 
1. Depreciation: New vehicles tend to depreciate rapidly in the first few years of ownership. This can lead to a significant GAP between the car's value and the original purchase price or replacement cost.
2. High loan-to-value (LTV) ratios: When borrowers take out loans with high LTV ratios, they may owe more on the loan than the value of the car, creating a GAP.
3. Long loan terms: Longer loan terms can result in slower principal repayment, increasing the likelihood of a GAP between the outstanding loan balance and the depreciated value of the asset.
4. Accidents or theft: In case of an accident or theft, the insurance payout might not cover the entire loan balance, leaving the borrower in a negative equity situation.
Evaluating the need for GAP Insurance Based on Individual Circumstances
The decision to purchase GAP insurance when paying cash for a vehicle ultimately depends on individual circumstances. Factors to consider include:
1. Depreciation rate: Assess the expected depreciation rate of the vehicle, taking into account factors such as make, model, age, and mileage.
2. Financial cushion: Consider your financial situation and whether you have enough savings to cover potential financial losses in an accident or theft.
3. Risk tolerance: Evaluate your risk tolerance and comfort level with potentially having to cover a financial loss out of pocket.
GAP insurance is a clear consideration for buyers who finance their vehicle with a bank loan. It provides financial protection in the event of an accident or theft.
While GAP insurance may not be necessary for those who pay cash for their vehicles, it can still provide some protection in specific circumstances.
Before deciding to purchase GAP insurance, evaluating factors such as loan terms, asset depreciation, and existing insurance coverage is crucial.
Additionally, it is essential to compare GAP insurance policy options available, as coverage can vary between providers.
FAQs on GAP Insurance with a bank loan
Can you take GAP Insurance out at any time?
While buying GAP insurance at the same time as taking out the bank loan is typically recommended, many insurance providers offer the option to get GAP insurance after the vehicle is purchased.
However, there may be restrictions on when GAP insurance can be added, such as within a certain period from the loan origination date or before the asset depreciates beyond a specified threshold.
Typically you can take a Return to Invoice or Vehicle Replacement cover within 180 days of the vehicle purchase.
Does GAP Insurance help you get a better interest rate on your bank loan?
No. Having GAP Insurance is just a personal choice. You are not required to take out GAP insurance in any case, and taking GAP Insurance does not impact your eligibility for a bank loan.
The need for GAP Insurance is just for you to decide.
How many times can you claim on GAP Insurance?
Once. GAP Insurance is an 'all or nothing' type of insurance cover, like life insurance. Once you have made a GAP Insurance claim on the policy, that is the end of that cover. You can then get a brand new GAP Insurance policy for your replacement vehicle.
Can you get GAP Insurance through your bank?
It is possible but doubtful. A bank loan is against the borrower and not a car, so the bank may not be particularly interested in what you are borrowing the money for. The loan could be for a caravan, watch, wedding, holiday, or other reasons.
Can you get GAP Insurance with your car insurance?
Again, possibly. Some car insurance providers have been known to sell GAP Insurance in the past. However, this is commonly through one of many specialist GAP Insurance providers.
Can you get your deposit back with GAP Insurance on a bank loan?
If you take out GAP Insurance when you have financed your vehicle purchase through a bank loan, you can protect any deposit you put into the purchase.
For example, if you take out a Return to Invoice GAP Insurance on a vehicle purchased for £20,000 with a bank loan of £15,000, you are putting a £5,000 deposit in.
If the vehicle is written off or stolen, your RTI GAP Insurance can top up your standard car insurance market value settlement to the £20,000 you originally paid. This, in effect, covers your deposit plus any equity you have from making further payments on your finance agreement.
Do I still need GAP Insurance if I pay my bank loan off?
The protection provided by an RTI or VRI GAP Insurance policy remains the same if you pay off your bank loan early. You can still top up your motor insurance payout back to either the price you first paid or the future cost of a replacement car, depending on which GAP cover you took.
Published 14/5/2023, written by Mark Griffiths
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