Guaranteed Asset Protection (GAP) insurance is a financial product often sold when you buy or lease a brand-new car. It is designed to protect you against financial loss if your car is declared a total loss by your motor insurance company following a fire, theft or accident.
If your vehicle is written off (damaged beyond repair) by your motor insurer, there may be a ‘gap’ between what your insurer pays out and what you still owe on the car. A GAP insurance policy covers the monetary difference between the motor insurer pay out and the amount needed to pay the outstanding balance on your finance settlement.
If your vehicle is stolen or written off in an accident during your leasing period, your insurer will usually pay out what it's worth based on its market value at the time of the theft or accident. For brand new cars, this is likely to be less than what you owe on the finance agreement meaning there may be a 'gap' between the amount your insurer pays and the amount outstanding on the finance settlement.
For example, you decided to lease a Volkswagen Golf worth £16,995 over three years and paid an initial rental of £1500. Three years later, the vehicle was stolen or written off. Your insurance company will usually pay you the fair market value (what your Golf is worth on the day it was stolen) which according to today’s calculations is in the region of £8,688.
Your finance company send you a settlement letter of £11,700. This means that you now have no car, no initial rental and still owe the finance company £3012.
In this example, a GAP insurance policy would pay the difference between your Golf's valuation on the day it was written off and the outstanding finance, leaving you with no financial liability to your old car and free to lease another vehicle. Without a GAP insurance policy, you would need to find this shortfall elsewhere, either by using savings or re-financing the balance.
GAP insurance is a financial product designed to work alongside your motor insurance. Even if your car insurance is fully comprehensive, you can still lose money if your brand new car is declared a total loss by your motor insurer. This is because most brand new cars lose their value very quickly from the point of purchase.
When you lease or buy a new car or van, it is an accepted fact that the value of it drops as soon as you start driving it and continues to depreciate over the years. How much a vehicle depreciates depends on lots of things such as the model of car, how old it is, how many miles it's covered and the condition. The AA estimate that the average car value falls by 40% in the first year and up to 60% in the first three years of ownership. This means that if your new car cost £20,000, it might only be worth £8,000 after three years. This may result in a shortfall between the price you paid at the outset (or took out on finance) and the amount you receive from your insurer.
To consider whether GAP insurance is right for you, you need to think about the types of scenarios that could happen during the period of your lease contract, such as:
Each year in the UK over 150,000 cars are stolen making car crime a huge and profitable business, costing billions of pounds a year and representing around a third of all reported crime. It is also estimated that 70% of stolen cars are broken up and sold for spares, while the rest are given a false identity and sold or exported to other countries, making it more difficult than ever for the authorities to recover a stolen vehicle.
Analysis by HPI reveals that around 500,000 vehicles are written off a year. Further research by Churchill Car Insurance estimates that nearly 34,000 of claims made in 2016 were made on vehicles less than five years old, with the average claim value standing at over £9,000.
Vehicle fire is often forgotten about but statistics show that there were 50,800 vehicle fires in the UK in 2007. While most assume car fires are the results of crashes or collisions, many occur actually while the car is in normal use. Statistics from the Home Office show at least 28% of fires are electrical and 39% are suspected to be caused deliberately.
While GAP insurance is not compulsory, it is a popular product for customers on a finance agreement like contract hire because they usually have little, no or negative equity in their vehicle. This means they may end up owing more than the value of the car if the vehicle is declared a total loss by their motor insurer.
Key benefits include:
You wouldn’t be able to afford to replace your car
Your finance arrangement means you’re due to be left with a big lump sum to pay at the end, also known as a ‘balloon payment’
You are on a long-term agreement (over three to five years)
You paid a low initial rental on your agreement (e.g. 20%)
You are on a contract hire deal
Our GAP Insurance policy is called Hire and Lease GAP insurance (also known as Finance GAP) and is specifically designed for vehicles on Contract Hire and Personal Contract Hire agreements.
A Hire and Lease GAP policy pays the monetary difference between the amount owed on a finance agreement (i.e. the lease) and the market value at the time of the claim. This leaves you with no liability to your old vehicle.
Hire and Lease GAP offers many advantages including:
GAP insurance is an optional product and is not legally required when you lease a vehicle with Nationwide Vehicle Contracts. Whether you choose to take out a GAP insurance policy is up to you however it is worth noting that you only have a limited amount of time to take out the policy. Please get in touch if you have any questions.
As with every type of finance product, it is important that you fully research the benefits and features and exclusions before taking it out to ensure it is right for you.
A GAP insurance policy may not be suitable for everyone, therefore, it worth considering a few factors that may influence your decision.
Hire and Lease GAP insurance may not be suitable if:
As with every type of finance product, it is important that you fully research the benefits, features and exclusions before taking it out to ensure it is right for you. It is also important that you ask questions on anything you do not understand or need any clarification on.
GAP insurance might not cover you for as much as you’re expecting:
Nationwide Vehicle Contracts can offer Hire and Lease GAP insurance from as little as £199 for up to £15,000 worth of cover. This premium price provides cover for the full term, is not annually renewable and includes Insurance Premium Tax.
You can choose to pay for the GAP insurance premium as one lump sum or by 10 monthly direct debit instalments. If you wish to pay for the premium in full, this is payable by debit or credit card or by BACs payment.
More details about Gap Insurance can be found on our GAP Insurance FAQ Page.