GAP stands for Guaranteed Asset Protection. The easiest way to think about it is as a form of car insurance that protects against a gap in value when it comes to claiming. Almost all car leasing brokers will insist you have GAP insurance in place before delivering their car. This is to ensure they can recoup their investment should you write the car off. (GAP protection is available for other car finance options like Hire Purchase and PCP and salespeople will often recommend it.)
GAP insurance covers the difference between what your car is currently worth and how much you originally paid for it, in the event that you need to make a claim.
It can be useful if you’re insuring a relatively new car and want to counteract depreciation. This is because cars have a tendency to lose value quickly, affecting how much money you can claim through a standard insurance policy.
GAP cover is a way to maximise the value of your car and to make sure that you don’t put yourself at the mercy of financial risks associated with its depreciation.
It’s been given a bad reputation by pushy car sales staff in the past, but GAP insurance can be a useful protection sometimes. Here’s some more details about it.
How does GAP insurance work?
If you were to claim on an ordinary insurance policy, the company would only pay you the amount that the car was worth at the time of the accident.
Cars obviously depreciate in value very quickly and it's a general rule that a new car loses 40% of its value in the first year that you have have it. This means that if you have an accident in your first year, your insurance policy will only give you the value of what your car is worth at the time of the accident.
Say you’ve owned a car for only 12 months, after buying it new for £20,000. It’s generally held that new cars lose 40% of their value in their first year of ownership, so the insurance company would only pay out £12,000. This means that you’d be out of pocket to the tune of £8,000.
If you’ve got a car through a finance scheme like PCP, PCH or BCH, GAP insurance will help you to get claim the money for a new car of the exact value that you paid at the start of the agreement. If you’re happy enough with a replacement car, and don’t want a brand new one, GAP probably isn’t for you.
It’s not the best insurance in terms of value-for-money, it has to be said, but it’s better if you’ve got a new car. You’ll need to have comprehensive insurance which pushes your budget up. GAP insurance claims ratios – the difference between the cost of your premium and what the insurance policy will pay out if you need to make a claim – are also notoriously bad value in some cases.
Types of GAP insurance
There are a few different types of GAP insurance to choose from.
1. Finance GAP Insurance
This is a type of GAP insurance for people who are leasing their vehicle or if they have it on a credit agreement. With finance GAP insurance, the policy will pay the difference between your insurance company’s final payment and the amount of money that you have left to pay on your finance at the time.
2. Return to Value GAP insurance
Aimed at people who’ve bought a pre-owned car, return to value insurance covers the difference between the value of the car when it was new and the maximum payment that your main insurer would make.
3. Vehicle Replacement GAP insurance
It covers the difference between the amount that your car would cost to buy the same model of car, with the same spec, at the time of the accident and the amount that your insurance company would pay out if the car was written off.
4. Return to Invoice GAP insurance
This form of insurance will pay out the difference between what you paid for your car on the initial invoice you received and the insurer’s payment.
Reasons to get GAP insurance
- It protects you against a ‘gap’ in value if you need to claim on your insurance
- It can counteract the effect of your car’s depreciation in value
- If you’re on a finance agreement when an accident happens, GAP can help you to pay off the agreement faster
Reasons to not get GAP insurance
- If you’ve paid for your car in cash, this type of insurance is essentially worthless
- You’ll need to have a comprehensive insurance policy to take out GAP insurance
- If you’re not bothered about getting a new car following an accident