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, flood 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.
GAP insurance is designed to cover the difference between the actual value and the fair market value offered by your insurers. 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 at the time 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.
When flooding affects areas of the UK, it’s not just homes and roads that can be severely affected, but cars as well. Cars hit by flooding are often an insurance write-off because if flood water gets into the engine components, they will all need changing to ensure the car will still work properly. Even when the car has dried out, the effect on the electricals are likely to be permanent.
If you are worried about any of the above and don’t feel you would have enough savings to cover a potential shortfall if the worse does happen, it might be worth considering GAP insurance.
GAP insurance is optional and whether you feel it is worth it depends on how likely you are to suffer a write-off. 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 written off (total loss) or stolen, you might end up owing the contract hire company more than your insurance company is willing to pay out.
You paid a low initial rental on your agreement (e.g. 20%)
You are on a long-term agreement (over three to five years)
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 contract hire deal
Our GAP Insurance policy is called Contract Hire GAP insurance (also known as Finance GAP) and is specifically designed for vehicles on Contract Hire and Personal Contract Hire agreements.
A Contract Hire 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.
Contract Hire 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. You must apply for a policy within 60 days of delivery of your vehicle.
As with every type of finance product, it is important that fully research the benefits and considerations before taking it out to ensure it is right for you. It is also important that you pay attention to the fine print as there are exceptions to the policy.
A GAP insurance policy may not be suitable for everyone therefore it worth considering a few factors that may influence your decision.
Contract Hire GAP insurance may not be suitable if:
As with every type of finance product, it is important that you fully research the benefits and considerations before taking it out to ensure it is right for you. It is also important that you pay attention to the terms and conditions and other fine print as there are exceptions to the policy, and 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 Contract Hire GAP insurance from as little as £199 for up to £10,000 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 12 monthly direct debit installments. 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.