Car gap insurance: what is it and do you need it?

It’s difficult enough trying to navigate the world of car finance, without more thrown into the mix.

Should you need to pay your finance back before the end of the term, guaranteed asset protection (GAP) insurance can help plug the gap.

What is GAP insurance? 

Many people these days opt to purchase a vehicle using a variety of payment terms and agreements, rather than paying the full amount upfront.

Two of the most common methods of financing a new car are Personal Contract Hire (PCH) and Personal Contract Purchase (PCP).  

As with any vehicle used on public roads, you will need to ensure you have insurance that covers you for a minimum of third-party damage and that is appropriate for your usage, whether that be social, domestic and pleasure, commuting or business. 

If you are purchasing using a PCP or PCH agreement, then guaranteed asset protection (GAP) insurance is a sensible and prudent option.

GAP insurance is exactly as it sounds – that is, it plugs the gap between how much you might receive from your insurance company in the event of your vehicle being written-off, and the actual amount that it costs to replace the car. 

When determining the value of your vehicle during a claim to replace it, insurers may only pay out the current market value, rather than its ‘as-new’ replacement price.

According to the AA, new cars lose a third of their value once driven off the forecourt. 

GAP insurance will cover the difference between your insurance pay-out and the cost to replace your damaged or stolen vehicle. 

How does GAP insurance work? 

Imagine this: eight months ago, you bought a car worth £20,000 using a PCP agreement, for which you pay a monthly amount. Everything is going fine. However, one morning you come downstairs and see your car has been stolen. You ring the police and then you call your insurers.

The insurance company eventually agree to replace your car, giving its current market value as £14,000, but the finance company has given a figure of £20,000 for full settlement of the agreement. 

It’s at this point that, if you’ve taken out GAP insurance, you can then simply call them up and claim for the £6,000 difference. 

Do I need GAP insurance? 

Unlike car insurance, GAP insurance is optional and not a legal requirement.

However, should the worst happen and your vehicle is stolen or damaged beyond economical repair, GAP insurance could help avoid unwanted debt or money issues. 

When considering whether or not you should secure GAP insurance, your answer will depend on your circumstances.

If you’re satisfied that your savings or other sources of funding would cover the monetary shortfall, then you may not need GAP insurance.  

If, on the other hand, you are worried about whether you could find that shortfall amount, then GAP insurance may provide reassurance. 

Is GAP insurance worth it? 

Like any insurance, you need to weigh up the odds of needing to use it against your own personal financial situation.

Research by Money UK shows that up to 34% of UK adults either have no savings to their name or have less than £1,000 in their savings accounts in 2024.

If you can relate to this, you’ll certainly want to consider GAP insurance.

What are the different types of GAP insurance? 

When looking at GAP insurance you’ll find that there are three mains types for you to consider.  

Back-to-invoice GAP insurance will cover the difference between the amount at which your insurance company currently values your car, and how much you originally paid for it or how much you need to pay the car hire company. 

Contract-hire GAP insurance will cover anyone on a PCH agreement, for the monthly payments for the rest of the term.

The regular car insurance will cover the cost of replacing the actual stolen or damaged vehicle. 

Vehicle replacement GAP insurance pays you the difference between what the insurer will pay you and what you would pay if you bought the car today brand new or, if it was a used car, its original price. 

Can GAP insurance cover negative equity?  

This may well come about if you part-exchanged your previous car with existing finance at the start of the current finance agreement.

You will have effectively transferred the old debt into the new agreement.

Other types of GAP insurance are likely not to cover the previous debt that has been carried over, whereas negative equity GAP insurance will. 

What is return to value (RTV) GAP insurance? 

This form of GAP insurance is similar to return to invoice (RTI) insurance except that it helps you fund the difference between what your insurance company pays out and the market value of your car when you bought it.

This is particularly appropriate for second-hand cars purchased using a finance agreement. 

So, if you’re wondering whether GAP insurance will replace your car, the answer will depend on which of the above types of cover you have taken out. 

How much is GAP insurance? 

This largely depends on the type and extent of cover you require, and it’s always worth shopping around to get the best deal.

Car dealers and salespersons are no longer allowed to sell you GAP insurance at the time of buying your car; they have to give you at least two days post-sale. 

You should look online, as research carried out by Money Saving Expert found that GAP insurance policies sold via dealerships were significantly more expensive than those found online. 

How long does GAP insurance last? 

You can usually take GAP insurance out for one to five years, which matches the length of many finance agreements.

You ideally want your insurance to last for the duration of your finance term. 

What are the best GAP insurance providers? 

A whole host of GAP insurance companies have come onto the market, which makes it hard to know what to look out for and which to choose.

In order to help you select the right policy and provider for your circumstances, you should consider the following in your search: 

• The length of the policy
• The excess and any policy exclusions
• The cancellation terms
• Reviews from previous and current customers 

It’s also worth discussing the various policy options with a financial adviser. 

How do I claim GAP insurance? 

In the unfortunate event that you have your vehicle stolen or damaged beyond repair, you need to know how to claim GAP insurance. 

Firstly, you will need to make your claim via your vehicle insurer, so that you can let your GAP insurance provider know the shortfall amount.

Make sure you check your terms and conditions for any time limits on claiming. Once you know the shortfall amount required, call or email your GAP insurance provider to file a GAP insurance claim and begin the claims process. 

Get expert financial advice 

Car gap insurance is a valuable investment for any vehicle owner, bridging the gap between how much your insurance company will pay out in the event of a vehicle write-off and the actual amount that it will cost you to replace your car.

Speaking with a financial adviser is the best way to determine if car gap insurance will benefit you and to find a policy that best meets your needs.

If you’d like more advice on finding the right GAP insurance policy for your circumstances, Unbiased has 27,000 financial professionals across the country who are ready to help you.

Let us match you to an expert financial adviser today.

If you found this article useful, you might also find our articles on commercial car insurance and electric cars informative, too.