Gap Insurance - What is it and Do You Need It?
Gap Insurance - What is it and Do You Need It?
Gap Insurance - What is it and Do You Need It?
You've probably heard about Gap insurance. But do you understand it and do you know why it's so important when leasing a car? This article explains exactly what Gap insurance is, to help you decide whether you want it or not.
Many people are unaware that if their car was to be written off or stolen during their finance agreement - they would be responsible for paying any shortfall between their finance company and their insurance company. This could amount to thousands.
Gap insurance provides you with a low cost insurance that'll protect you in the event of a 'total loss' situation.
What is Gap insurance? How does it work?
As with all finance agreements, if you terminate your agreement early - even if it's through no fault of your own - your finance company is likely to charge you a 'settlement figure'.
If your vehicle is ever written off or stolen (and not recovered) by your insurance company, there is a risk that you will owe more to the finance company than the amount that the insurance company will actually pay out. This is because insurance companies will generally only offer you 'market value' for your vehicle - and that may not be enough to pay the finance company's settlement figure.
This could leave you with a 'gap' to bridge. For example, a finance company's settlement figure might be £10,000 and the insurance company might value the car at £8,000. As you can see, there is a £2,000 shortfall.
In the likely event that your motor insurance company won't pay out the entire settlement figure - you will be responsible for the shortfall. So in the above example, you would have to pay £2,000 out of your own pocket.
This is not a downside to leasing a car. You would find yourself in the same situation if you had bought a new car with a bank loan or on HP. In the event of a write off, the amount you'd owe the finance company is still likely to be more than your motor insurance company would pay out.
This is because of depreciation. New vehicles on average lose 60% of their value in the first 3 years - this is likely to result in the value of the car falling below the amount still owed on the loan.
The good news is that with Gap insurance, this shortfall would be removed from you.
Do you need 'Gap insurance'? - Will you benefit?
Gap insurance is an optional supplementary insurance. It provides various protections against risks not covered by a standard 'fully comprehensive' motor insurance policy.
Should anything happen to your car - and remember incidents don't have to be your fault - Gap insurance will give you the chance to get another car without still owing something on your previous car.
If you don't have Gap insurance, you will be responsible for paying the 'gap' and will be out of pocket. Going back to the example - would you want to pay £2,000 out of your own money? Or would you want someone else to pay it?
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