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Does GAP Insurance cover negative equity when you trade in?

 

There can be a number of misconceptions and misunderstandings when it comes to GAP Insurance. Many people will understand that GAP Insurance is designed to cover issues caused by depreciation suffered by your vehicle over time.

 

This can lead to a number of questions and queries. One of these we will deal with here is; Does GAP Insurance cover negative equity when you trade in?

 

What is negative equity?  Does GAP Insurance cover negative equity on a trade in car?

 

The term negative equity comes from the relationship between the amount you may owe on a finance agreement and the value of your vehicle that the finance is tied to. When you have a higher finance settlement than the value of the vehicle, this shortfall is called negative equity.

 

For example, if you had a Personal Contract Purchase agreement on your vehicle, you had a settlement of £15,000, but the value of the vehicle was only £12,000, then you have £3,000 of negative equity.

 

If you looked to part exchange the vehicle at this point, you would have to find the £3,000 negative equity amount to clear off the finance.

 

But does GAP Insurance cover this for you if you have it on your car?

 

How GAP Insurance Works

 

In order for you to make a claim on a GAP Insurance policy, there are a number of criteria that need to be met. These include:

  1. You are in a position to suffer a financial loss.

  2. You have a fully comprehensive car insurance policy in place.

  3. The vehicle is written off or stolen.

  4. The motor insurer pays out the market value in settlement to you.

 

As you can see from this list, the example where you have negative equity on a car you want to part exchange does not meet all the criteria required for a GAP Insurance claim.

 

Whilst you do meet the first two conditions, as you are in negative equity and will suffer a financial loss when you part exchange, points three and four will not be met.

 

The vehicle is not written off or stolen.

 

Your motor insurer will not pay you the market value in a settlement because the vehicle is not written off or stolen.

 

So to answer the question, GAP Insurance policies do not cover negative equity when you trade in your car.

 

Frequently Asked Questions

 

Can you get any kind of insurance that can cover negative equity on a part exchange vehicle?   Negative Equity on a part exchange

 

No, not that we are aware of. GAP Insurance can only come into play if the vehicle is written off or stolen, not simply part exchanged and traded in.

 

If you have taken the vehicle on a PCP finance agreement, and you are trading in at the end, then the agreement does provide some protection against negative equity with the Guaranteed Future Value provided as part of the agreement.

 

Find out more about PCP finance in our PCP Finance Guide.

 

If you part exchange a vehicle with negative equity, can you carry the shortfall on to a new finance agreement?

 

It may be possible. It depends on the finance company and the car loan agreement being offered.

 

If you can carry over negative equity onto your new finance agreement, can you purchase GAP Insurance to cover this?

 

Not normally. A standard Return to Invoice GAP Insurance, Contract Hire GAP Insurance or Vehicle Replacement GAP Insurance does not cover a negative equity or shortfall carried from a previous finance agreement.

 

However, there is a specialist for of Finance GAP Insurance called Negative Equity cover, which can normally cover negative equity carried over up to a maximum amount.

 

For example:

  • You have a car that is valued at £15,000

  • You have outstanding finance of £17,000 on the Hire Purchase finance agreement

  • You part exchange the vehicle against a brand new car with an invoice purchase price of £20,000.

  • You take out a new finance agreement on the new vehicle for £22,000 (the £20,000 purchase price plus the £2,000 negative equity from the outstanding balance.

 

Negative Equity GAP Insurance covers the difference between the market value settlement from the motor insurer if the vehicle is written off and the outstanding finance balance on the car finance agreement. This shortfall would include the £2,000 negative equity carried forward from the previous finance agreement.

 

Published 31/7/23, written by Mark Griffiths