What Is Gap Insurance? PDF Print E-mail
Written by Tim Hibbert   
Thursday, 08 July 2010 12:41
There are a number of types of insurance available to you when you purchase a car. So many in fact you could easily end up paying more in premiums than you do in repayments. It is right to question and consider any insurance that is offered to you and decide if it's right for you - if you are paying for your car on a monthly payment, then Gap insurance coverage is certainly something you should consider.
by TimHibbert


There are a number of types of insurance available to you when you purchase a car. So many in fact you could easily end up paying more in premiums than you do in repayments. It is right to question and consider any insurance that is offered to you and decide if it's right for you - if you are paying for your car on a monthly payment, then Gap insurance coverage is certainly something you should consider.

Take this example - you purchase a car and obtain the usual comprehensive and full collision insurance coverage. The car then ends up in an accident and is written off 2 years after it was purchased. Whilst the other driver will be covered, the full purchase cost of the car will not be. Taking into account decreasing residual values, this can leave the owner vastly out of pocket. For example, a car is purchased for 20k and the payments are fixed. Within 2 years it will only be worth 12k to the owner, but the payments still have to cover the initial 20k price - the difference has to be paid out of the owners own pocket.

Therefore, "GAP insurance" is used to cover the difference between the actual value of a car at the time of an accident and how much the buyer still has outstanding on their payments. Using the example above, the GAP insurance policy would cover the 8k.

The residual value issue highlighted above is common amongst all makes and models of cars - whilst some types will hold their residual value better than others, all cars will at some point start to drop in value. Whether this begins over time or at the point the car is driven off the forecourt, the need to purchase a GAP insurance policy should always be at the forefront of a purchaser's mind.

The final point to note, it is extremely important to purchase your Gap Insurance policy at the same time that you purchase your car and take out finance. The policy will be based on the value of the car at the time it is taken out, not the initial value, therefore if you do suffer from rapidly dropping residual values, a policy taken out six months into the deal could still result in a large payment to be made in the event of an accident.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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