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Does GAP Insurance Cover Balloon Payments?
Understanding GAP Insurance and PCP finance
The Role of Balloon Payments in PCP Agreements
GAP Insurance and Balloon Payments
Understanding GAP Insurance and PCP finance
When UK car buyers look to fund their next vehicle purchase, one of the most popular options is a Personal Contract Purchase or PCP Finance agreement.
The basis of a PCP finance agreement is that you pay a deposit followed by fixed monthly payments and then you have a number of options at the end of the fixed term.
These are:
-
Hand the car back
-
Part exchange the car (if there is any equity) and buy a new vehicle
-
Pay off the finance (the ‘balloon’ payment), and you then own the vehicle
As you have a financial liability, many car buyers look to GAP Insurance to provide them with protection. 
One of the most common questions asked about GAP Insurance on PCP agreements is ‘Does GAP Insurance cover your balloon payment?’
To be clear, the answer is ‘yes’. Here we will explain why.
The Role of Balloon Payments in PCP Agreements
In a Personal Contract Purchase agreement, the finance company provide a balloon payment at the end of the agreement. This is known as the minimum Guaranteed Future Value for the vehicle.
Essentially, the finance company is saying at the end of the PCP they guarantee this value to the agreement holder. This provides protection because if the vehicle is worth less than this figure you can simply hand it back and you do not have to foot the shortfall.
If the vehicle is worth more than the balloon payment (known as a GFV or MGFV - Guaranteed Future Value or Minimum Guaranteed Future Value) then this equity can be used as a deposit for a new vehicle.
The balloon payment figure also lets you know, from day one, what you can buy the vehicle for at the end of the PCP deal. Simply pay the GFV payment and the car is yours.
The balloon payment provides lots of flexibility and protection for car buyers.
So why do consumers look to GAP Insurance for further protection and does GAP cover this balloon?
GAP Insurance and Balloon Payments
Whilst the balloon figure provides security at the end of the agreement, until you get to that point, you are equally as financially vulnerable as you would be on a hire purchase agreement or a bank loan.
So if you have a 3-year PCP agreement and the vehicle is stolen or written off after 2 years, what position would this leave you in?
Your motor insurer should provide you with a market value of the vehicle, in settlement. However, this may not be enough to clear the finance debt settlement at that time. This is where GAP Insurance can step in by adding a top up to the motor insurers settlement.
The three most popular types of GAP Insurance that are available when you buy a car in PCP are:
Combined Return to Invoice GAP Insurance: to cover from the motor insurers settlement to the higher of the outstanding finance settlement or the original purchase price paid.
Combined Vehicle Replacement GAP Insurance: to cover between the motor insurers' settlement and the higher of the outstanding finance settlement or the cost of the equivalent replacement vehicle.
Finance GAP Insurance: to cover the difference between the motor insurers' settlement and the outstanding finance settlement.
Why GAP Insurance can cover your balloon payment
The reason why GAP Insurance will cover the balloon payment if the vehicle is written off or stolen is quite simple.
The balloon payment forms part of the finance settlement for the vehicle. If the vehicle is written off then all the types of GAP Insurance, even the basic Finance GAP style, can cover to the finance settlement as a minimum.
Therefore GAP Insurance does cover a balloon payment on a car finance agreement as long as the vehicle is stolen or written off and is eligible for a GAP claim.
Conclusion
GAP insurance, even as an optional coverage, can provide valuable protection for car owners, particularly those who have financed their vehicle with a PCP agreement. .png "GAPInsurance123")
By covering balloon payments, GAP insurance can save you from significant financial stress if your car is stolen or written off.
Published 15/7/23, written by Mark Griffiths
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