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In the world of GAP Insurance products, few cause more confusion than Finance GAP. Why? Well, it is often attractive because it is the simplest and cheapest form of GAP Insurance. However, it is also the most basic form of GAP Insurance with limited benefits for many.
Here we explain how Finance GAP works, where it may benefit you and where it most definitely won't.
Finance GAP is a form of Guaranteed Asset Protection.
It can also be known by different names, including Finance Shortfall and Shortfall Insurance.
Finance GAP is specifically designed for finance agreements linked to a vehicle. This could be hire purchase, personal contract purchase and sometimes a contract hire lease.
Finance GAP is designed to cover the shortfall between the market value car insurance settlement from a motor insurance write-off claim and the outstanding finance balance on the vehicle.
Finance GAP is a GAP Insurance policy that is specifically designed for vehicles that are purchased under a finance agreement linked to the vehicle. These agreements can include hire purchase, PCP and, with some providers, a contract hire-style lease.
What Finance GAP will not cover is where you have a shortfall between the motor insurer's settlement and a loan not linked to the vehicle. Examples of this may be a bank loan or a personal loan. Here the loan is linked to you and not the vehicle. Unlike hire purchase, PCP or a lease, there may be no contractual requirement to pay off the loan if the vehicle is written off.
There are a few things that must be in place for you to make a successful claim on a Finance GAP policy.
You need to have fully comprehensive motor insurance in place.
You need to have a finance agreement on the vehicle where you can own the vehicle.
A Finance GAP Insurance policy
The vehicle is written off or stolen, and the motor insurer declares the vehicle a total loss.
The motor insurer pays out the current market value in a settlement.
You owe more on the finance settlement than the amount you receive from the motor insurance (i.e. you are in negative equity).
Let's illustrate this better by way of an example.
You buy a car for £25,000 in 2023.
You pay a £1,000 deposit and agree to a 5-year hire purchase agreement at £540 a month.
The amount you have initially borrowed is £24,000
The total amount of interest you will pay is £8,400 over 60 months. The total amount payable will be £33,400.
If the vehicle was stolen at the end of the first year, you may expect a financial situation as follows:
The current market value of the vehicle is now £20,000
The amount owing on the finance settlement is now £22,500
So if the motor insurer pays the market value in settlement (£20,000), you would still owe £22,500 on the finance agreement. This shortfall of £2,500 can be claimed on the Finance GAP Insurance policy.
Finance GAP safeguards you from potentially significant financial loss if your vehicle is written off or stolen.
Finance GAP will normally be the cheapest form of GAP Insurance you will find. Types of GAP Insurance cover like Return to Invoice and Vehicle Replacement GAP will be more expensive for the equivalent time period.
As Finance GAP only covers a potential shortfall between the car insurance market value settlement and the outstanding finance, the window that this may be the case can be short. This is because depreciation on the car will slow, and at some point, what you owe on the car may be less than the vehicle value covered by the motor insurer. You may not need a long-term Finance GAP policy if that is the case, again saving you on the premium price you will pay.
So if you have finance linked to the vehicle and all you want to do is cover off any potential shortfall on clearing that if the car is written off, then Finance GAP could be perfect for you.
But there still could be better options.
While Finance GAP Insurance provides valuable protection, it's important to understand its limitations.
In order to benefit from Finance GAP, you must have a gap between your motor insurance settlement and your outstanding finance settlement.
There can be reasons this may not actually be the case or a time when the possibility diminishes. These include:
You may have put a significant deposit or carried over equity from a part exchange vehicle. This lowers the amount you borrow against the value of the car. This may also reduce the chances of a 'gap' for a Finance GAP policy to fill.
You are in the later stages of a finance agreement. Here, the amount you owe on finance against the car's value may mean no 'gap' exists. For example, if you pay £200 on a 60-month finance agreement, the most you can owe with 12 months left is 12 payments of £200, so £2,400. The chances are the car will be worth more than that, so there would be no finance shortfall to fill.
Finance GAP only works on a hire purchase or personal contract purchase (PCP) agreement. It does not work with a bank or personal loan, even if you owe more on the finance agreement than the motor insurer pays out.
If you are looking to protect deposit or equity in your car, then finance GAP is not for you. It does not consider the original purchase price of the vehicle or the cost of a replacement vehicle. This is where other types of GAP Insurance, like Return to Invoice GAP and Vehicle Replacement GAP, offer more comprehensive coverage.
Combined Return to Invoice GAP Insurance covers the financial gap between the insurer’s payout and the original invoice price of the vehicle or the outstanding finance, whichever is greater at the time of a write-off.
This means that if your vehicle is written off, you will receive the full amount you paid for your vehicle. In turn, after you have paid off any outstanding finance, you can recover the deposit or equity you have put into the deal plus the capital you have paid off the car in the interim.
On the other hand, Vehicle Replacement GAP Insurance covers the gap between the insurer’s payout and the cost of an equivalent replacement vehicle of the same make, model, age, and specification as the original vehicle or the outstanding finance, whichever is greater at the time of a write-off.
This policy is beneficial if you’re concerned about potential price increases where the cost of buying the same car again could be higher than the amount you originally paid.
Both Return to Invoice and Vehicle Replacement GAP will return some money to the policyholder. Finance GAP cannot.
The increased competition with online GAP Insurance providers has led to some 'inventive' adaptations of GAP products at motor dealers. Traditionally the longest period of time available for a Return to Invoice policy in a showroom was often 3 years, maybe 4 at a very select few.
As motor dealers offered 4 or 5 year finance deals, then there was a period at the end of the finance agreement that customers buying their GAP Insurance may be left without cover.
One particular solution provided by some dealers was quite inventive.
They would provide a Return to Invoice GAP policy that could cover you on a back to invoice price for a period of, say, 3 or 4 years. They would then tag on Finance GAP cover for the remaining period up to 5 years.
So essentially, you would be covered back to your invoice price initially, then once this period passes, you could be covered for a finance shortfall for the remainder. Often this was promoted as a 'free' addition to the policy and allowed it to be marketed as a '5 year' GAP policy.
However, the added 'benefit' or finance GAP cover in the final year or so may not be much of a benefit at all.
As we have covered elsewhere, Finance Shortfall GAP only covers a gap between the motor insurers' settlement and the outstanding finance settlement. In the final year or so of a 5 year finance agreement, this 'gap' may not even exist. Even if it does, the shortfall could be very small.
Because the depreciation suffered by the car has slowed significantly and the amount you owe on finance is small. It is often the case that the vehicle is worth more than the finance settlement. Therefore the motor insurance settlement should cover this. There is no 'gap' to fill on a finance shortfall basis.
There are potentially four or five year Return to Invoice products available online these days. These can cover you back to your full invoice price for the full term. This would mean you can recover all of the deposit, equity and capital you have built up in the car.
With a 'convertible' policy, you lose that protection as soon as the RTI cover ends and the finance GAP cover takes over.
Not all 4 and 5 year 'RTI' GAP Insurance policies are the same.
Choosing the right Finance GAP Insurance provider is crucial. Factors to consider include the provider's reputation, claim limits, policy duration, cost, and any exclusions. It's also worth checking if the policy offers flexibility, such as the ability to transfer the policy if you change your vehicle before the end of the policy term.
Finance GAP Insurance covers the financial 'gap' between the market value of your vehicle at the time of a total loss and the outstanding balance on your finance agreement.
In some cases, yes, it can be. However, you need to check the policy terms carefully. Contract Hire vehicles are leased, and there is no option to own the vehicle.
However, similar to HP or PCP, there can be a shortfall between a comprehensive car insurance policy payout and the outstanding settlement due to a lease or finance company.
Therefore a Finance GAP policy could cover a lease agreement as long as the GAP provider allows for it in the policy terms.
Many do not.
Many GAP Insurance providers have specific Lease GAP Insurance or Contract Hire GAP Insurance products. These allow to cover a shortfall on the lease agreement. They also provide optional protection for advanced rental protection (known as deposit protection) that a Finance GAP product may not.
Always check what a policy can protect you; do not assume Finance GAP is the same as Contract Hire GAP.
Negative Equity GAP is a specialist form of Finance GAP. It provides the same basic cover as Finance GAP Insurance but will also provide additional benefits. This comes when carrying over some negative equity from your trade-in car and adding this to the amount you have financed on the new vehicle.
So, for example, you buy a car for £25,000. You trade in a car against this where the part exchange is valued at £10,000, but you still owe £12,000 on the finance. The £2,000 negative equity is added to the finance agreement of the new vehicle.
This means that, in the event of a claim, the Negative Equity GAP can cover any difference between the motor insurers' settlement and the outstanding finance settlement. However, subject to the policy claim limit, this would include the £2,000 negative equity carried from the previous finance agreement.
Negative Equity GAP is difficult to find in the UK marketplace in 2023.
Yes, Finance GAP Insurance specifically covers the 'gap' related to the outstanding balance on your finance agreement. It should be noted the car loan must be linked to the vehicle. If it is a bank loan or personal loan then the finance is not linked to the car.
Whether GAP Insurance is worth it depends on your individual circumstances. GAP Insurance can provide valuable protection on cash or finance purchases, on either new of used vehicles.
Where you buy GAP Insurance may also add to the 'value' of the cover. The GAP Insurance cost in a motor dealer is normally far more expensive than the equivalent policy sourced online.
Ultimately whether you purchase GAP Insurance depends on your viewpoint and desire to top up the car insurance provider settlement.
The maximum term of cover on a Finance GAP Insurance policy varies between providers, but it typically ranges from 1 to 5 years.
This is where Finance GAP is added alongside another form of GAP cover. For example, Combined Return to Invoice is a mixture of Return to Invoice GAP and Finance GAP.
In the event of a total loss, the benefit of a combined policy is that you are covered to the highest benefit at the time you claim. So with a Combined RTI GAP, you are covered to the higher of the outstanding finance settlement or the original invoice price you paid.
This provides you with more flexible protection and, it must be said, a more comprehensive cover.
Finance GAP Insurance is an important consideration for anyone purchasing a vehicle under a finance agreement in the UK. It provides valuable financial protection, covering the 'gap' between the insurer's pay out and the remaining balance on your finance agreement if your vehicle is written off or stolen.
However, it's important to understand its limitations and consider other types of GAP Insurance that may offer more comprehensive coverage.
Published 22/7/23, written by Mark Griffiths