GAP Insurance Explained - Do I Need GAP Insurance on a Financed Car?

The moment you drive your shiny new car off the dealership forecourt, it begins to lose value – and faster than you might think. 

This rapid depreciation can create a worrying financial gap between what you owe on your finance agreement and what your car is actually worth if it's written off. That's where GAP insurance comes in, but is it worth the extra cost? And do you really need it for your financed vehicle?

We know extra types of insurance can feel like an added expense you could do without, especially with all the other costs of running a car. But don't worry – we'll break down everything you need to know about GAP insurance in plain English, helping you make an informed decision about whether it's right for you and your financed car. Read on to find out more...

What's in This GAP Insurance Guide?

1. What exactly is GAP insurance?
2. The Different Types of GAP Insurance
3. Do I Really Need GAP Insurance?
4. GAP Insurance FAQs
5. Additional Advice and Tips

Key Takeaways:

• GAP insurance covers the difference (or 'gap') between what your insurer pays out and what you still owe on finance if your car is written off
• New cars can lose up to 60% of their value in the first three years
• Without GAP insurance, you could be left paying for a car you no longer have
• There are three main types: Return to Invoice, Finance/Contract, and Vehicle Replacement GAP
• GAP insurance is particularly valuable for new cars, cars on long finance terms, and vehicles with rapid depreciation
• Policies typically cost between £150 and £400 for three years of coverage
• You don't have to buy GAP insurance from your dealer – shopping around can save you money

What exactly is GAP insurance?

GAP (Guaranteed Asset Protection) insurance is essentially a safety net for your car finance. It bridges the difference – or 'gap' – between what your standard car insurance pays out if your car is written off or stolen, and what you still owe on your finance agreement.

Here's a simple way to understand it in six easy steps:

1. You buy a new car for £25,000 using car finance
2. Two years later, it's written off in an accident
3. Your car insurance values it at just £15,000 (its current market value)
4. But you still owe £20,000 on your finance agreement
5. Without GAP insurance, you'd be left paying £5,000 for a car you no longer have
6. With GAP insurance, that £5,000 difference would be covered

Why Does GAP Insurance Exist?

Cars depreciate – it's an unavoidable fact. In fact, most new cars lose around 15-35% of their value in the first year alone and up to 60% by the end of year three. Meanwhile, your finance balance reduces more slowly, especially in the early years of your agreement.

This creates a period, often lasting several years, where you owe more than your car is worth. Insurance industry professionals call this being "upside down" or having "negative equity" on your car.

The Different Types of GAP Insurance

Not all GAP insurance is created equal. There are three main types to consider, each offering slightly different levels of protection:

Option 1 - Return to Invoice (RTI) GAP

Return to Invoice (RTI) GAP covers the difference between your car insurance payout and the original price you paid for the car. This is particularly useful if you put down a large deposit.

Here's an example:

• You bought your car for £25,000
• Your car is written off after two years
• Your car insurance pays out £15,000 (the current market value)
• RTI GAP would pay the £10,000 difference between the insurance payout and what you originally paid

Option 2 - Finance GAP (Lease or Contract Hire GAP)

Finance GAP (sometimes called Contract GAP because of its benefits to those leasing or in Contract Hire agreements) covers the difference between your car insurance payout and the outstanding balance on your finance agreement. This is often the most straightforward option for those primarily concerned about covering their finance.

Here's an example:

• You still owe £20,000 on your car finance
• Your car is written off
• Your car insurance pays out £15,000
• Finance GAP would pay the £5,000 difference between the insurance payout and what you still owe

Option 3 - Vehicle Replacement GAP

Vehicle Replacement GAP is the most comprehensive option. It covers the difference between your car insurance payout and the cost of replacing your car with an equivalent new model – even if that's more than you originally paid.

Here's an example:

• You bought your car two years ago for £25,000
• The same model now costs £27,000 new (due to inflation or price increases)
• Your car insurance pays out £15,000 for your written-off car
• Vehicle Replacement GAP would pay £12,000, allowing you to replace your car with the same model

Do I Really Need GAP Insurance?

This is the million pound question our experts get asked a lot, and we wish we had a straightforward answer, but the truth is, the solution isn't the same for everyone. So, here's a simple way to think about it:

You might benefit from GAP insurance if:

1. You've bought a brand new car (which depreciates quickly)
2. You're on a long finance term (4+ years)
3. You've put down a small deposit
4. You're using PCP finance (where a large balloon payment is due at the end)
5. Your car is known to depreciate rapidly
6. You're concerned about being left with debt after a write-off

You might not need GAP insurance if:

1. You bought a used car that's already 3+ years old (most depreciation has already happened)
2. You put down a large deposit (30% or more)
3. You're on a short-term finance agreement
4. You've got sufficient savings to cover any potential gap
5. Your car holds its value particularly well

Did You Know?

You don't have to decide on GAP insurance the day you buy your car. In fact, the Financial Conduct Authority (FCA) rules mean that dealers cannot sell you GAP insurance on the same day they sell you the car – there must be a 2-day cooling-off period. Use this time to shop around and compare prices.

GAP Insurance FAQs

Q: Can I cancel GAP insurance if I sell my car?

A: Yes, most GAP insurance policies can be cancelled if you sell your car or pay off your finance early. You'll typically receive a pro-rata refund for the unused portion of your policy.

Q: Is GAP insurance the same as PPI?

A: No, they're completely different. Payment Protection Insurance (PPI) covers your finance payments if you're unable to work. GAP insurance specifically covers the difference between your car's value and your finance balance if the car is written off.

Q: Will GAP insurance cover my excess?

A: Some GAP insurance policies will cover your excess (typically up to a certain amount, often £250). Check the policy details carefully, as this varies between providers.

Q: How long does GAP insurance last?

A: Most GAP insurance policies last between 1 and 5 years. Three years is a common choice, as this covers the period when most cars experience their steepest depreciation.

Q: Can I get GAP insurance for a used car?

A: Yes, GAP insurance is available for used cars, too. However, the benefits may be less significant as used cars typically depreciate more slowly than new ones.

Additional Advice and Tips

5 Common GAP Insurance Pitfalls to Avoid:

1. Buying without comparing prices (policies directly from the dealer  are often significantly more expensive)
2. Not checking exactly what's covered (especially regarding excesses)
3. Duplicating coverage that might already be included in your car insurance
4. Paying for coverage that extends beyond your finance term
5. Not understanding the claims process before you need to use it

Pre-Purchase Checklist

Before buying GAP insurance, ensure you:

• Understand exactly what type of GAP insurance you're buying
• Know how long the coverage lasts
• Have checked whether your car insurance has any "new car replacement" coverage
• Have compared prices from at least three different providers
• Have read the policy documents carefully, particularly regarding exclusions

Ask Our Experts About GAP Insurance

At Octane Finance, we're not just here to arrange your car finance - we're here to make sure you're protected throughout your finance journey. We've helped thousands of drivers across the UK find the right protection for their vehicles, and we'd love to help you too!

Whether you're just exploring your options, have recently financed a vehicle, or want to know if your current GAP insurance is providing good value, our team is here to assist. Get in touch today.