Hello all. I was alerted to this thread by good old 'Google Alerts' because "GAP insurance" was mentioned. Having read the two posts above (moreso the most recent one by Linsco56 - sorry) it's clear that there's some confusion about GAP insurance so I thought I'd step in to help.
To clarify, I sell GAP insurance for a living (That is to say that I'm a specialist broker of it, I don't sell cars).
Whilst what Linsco56 has said is not "wrong", it's not entirely correct either. You see, Linsco56, respectfully whilst you've made the initial link that buying a car on finance and paying a minimal deposit potentially exposes the buyer to some often unexpected financial burden in the event that the vehicle is written off, I feel you've fallen short of explaining it fully (e.g. after making the link to exposure with finance, you then explain how an Invoice GAP insurance policy would work which, strictly speaking, wouldn't necessarily deal with further charges from the finance agreement due to early settlement - unless your example is in relation to an interest-free finance agreement).
Nevertheless, the belief (and it's a popular one) that GAP insurance is ONLY ever of benefit to those who finance their vehicles, is misguided and based on knowledge old(er) types of GAP insurance.
Let me try to explain... there are actually a number of different types of GAP insurance which in the event of your vehicle becoming a Total Loss (aka "write-off") through accident, fire, theft or flood etc, work as follows:
Finance GAP insurance
This policy aims to pay the difference between your Motor Insurance payout and the amount outstanding on finance at the time of claim.
Invoice GAP insurance
This policy aims to pay the difference between your Motor Insurance payout and the original invoice price that you paid to put the vehicle on the road when you bought it.
Replacement GAP insurance
This policy aims to pay the difference between your Motor Insurance payout and what it would cost at the time of claim to replace the vehicle with a brand new* version of the same (or nearest equivalent) vehicle - even if that costs more than the original invoice price you paid for your vehicle when you bought it.
To add further confusion, there are then "combination" policies such as:
Combined Finance & Invoice GAP insurance
This policy would aim to pay the difference between your Motor Insurance payout and THE GREATER of either:
1. The amount outstanding on finance at the time of claim.
or
2. The original invoice price that you paid for the vehicle when you first bought it.
Combined Finance, Invoice & Replacement GAP insurance
This policy would aim to pay the difference between your Motor Insurance payout and THE GREATER of either:
1. The amount outstanding on finance at the time of claim.
or
2. The original invoice price that you paid for the vehicle when you first bought it.
or
3. What it would cost to buy a brand new* version of the same (or nearest equivalent) vehcle at the time of claim.
* - Assuming the vehicle you bought originally was brand new.
Examples:
Taking at least some of Linsco56's figures as a start point, let's assume you buy a brand new vehicle based on the following:
A - Full list price £23,000
B - Invoice Price paid (after discount): £20,000
C - Amount Financed: £19,000
Let's say after a period time your car is written off and your Motor Insurer offers you £15,000 (D) as the value of your car BUT you have £16,000 (E) outstanding on finance.
> Without GAP insurance
With no GAP insurance you'd not see any of the £15,000 (D) payout from your motor insurer because it'd all be paid to the finance company who'd then come after you for the remaining £1,000 (E-D).
You'd therefore have to pay £1,000 out of your own pocket before (or as part of) sourcing your next car.
> With Finance GAP insurance
With Finance GAP insurance the £1,000 shortfall between your Motor Insurance payout (D) and the Finance Agreement Settlement Figure (E) would be paid for you. Meaning you would be starting from a "zero" position in sourcing your new car.
> With Invoice GAP insurance
With Invoice GAP insurance the £5,000 shortfall between your Motor Insurance payout (D) and the original invoice price (C) would be paid. You'd use £1,000 of this to settle the remaining balance of the finance agreement (E-D) and be left with £4,000 to put towards your next car.
> With Replacement GAP insurance
With Replacement GAP insurance, assuming the full list price of the brand new equivalent vehicle is still £23,000 the £8,000 shortfall between your Motor Insurance payout (D) and the replacement vehicle list price (A) will be paid. You'd use £1,000 of this to settle the remaining balance of the finance agreement (E-D) and be left with £7,000 to put towards your next car.
If the list price of the replacement vehicle had increased to say £24,000 by the time of claim, the Replacement GAP insurance policy would aim to pay out to the higher figure.
> Cash purchases
If you didn't finance the car purchase but had bought it cash outright (or if the finance had been settled by the time of claim):
Finance GAP insurance would be defunct and wouldn't pay out anything so you'd be left with just your Motor Insurance payout (in this example, £15,000) to put towards your next car.
Invoice GAP insurance would STILL pay out the difference between your Motor Insurance payout and original invoice price. Whilst Replacement GAP insurance would STILL pay out the difference between your Motor Insurance payout and the cost of replacing the vehicle with a new equivalent at the time of claim.
In these cases, you'd have the combined sum of your Motor and GAP insurance payouts (In this example £20,000 with Invoice GAP insurance or £23,000 with Replacement GAP insurace) to put towards your next vehicle courtesy of none of it being required to be paid to a finance company.
To sum up
If you buy the correct type of GAP insurance and your car is written off as part of a valid Motor Insurance claim, GAP insurance is always beneficial.
The only time a GAP insurance policy could or would NOT be beneficial, is if you buy a GAP insurance policy and your car is NOT written off. But then we're in to the argument of whether the peace of mind of having the policy in place at all is worth the cost and that's a whole other debate (e.g. is insurance a waste of money if you find you never need to claim?).
That said for much the same reason, buying GAP insurance from a Motor Dealer is almost always NOT a good idea when you can get usually superior cover from a specialist broker for in some cases up to 85% lower than the Motor Dealer will charge you.
I hope this helps and if anyone here has any questions about GAP insurance I'm more than happy to assist.
