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What is GAP Insurance and do I Need it?

What is GAP Insurance and do I Need it?


When you're buying a car, you may be offered GAP insurance; but what is it and do you really need it?

What is GAP insurance and do I need it?

When you're buying a car you may be offered a product known as GAP insurance, but what is it and do you need it. Here we take a look at what it does and whether it's something you should be considering.

What is GAP insurance?

If your car is declared a total write-off, then GAP insurance does exactly what it says on the tin, it bridges the GAP between your insurance pay-out and your finance settlement figure; if you don’t have GAP, then you have to fund that shortfall out of your own pocket.

Mind the Gap sign at the edge of a train station platform

What about my motor insurance, surely that’s what I’m paying for?

If you have ‘new for old’ motor insurance that’s great, but only if the write-off happens during the first 12 months of your ownership; after that timeframe things become much more tricky and without GAP insurance, you’ll be picking up the cost of the shortfall.

Why buy GAP Insurance?

After 12 months the ‘new for old’ part of your policy will, sadly, no longer apply. This means your insurance company will only pay out the market value for your write-off and that’s normally around the same value as the trade price of your car.

If your write-off happens during the second year of your ownership, then you’ll still be in the early part of your finance agreement and thus you’ll mainly have been paying off the interest (just like on a mortgage) and that’s why you could find yourself in the unfortunate position of owing more to settle your finance agreement than your insurance company is willing to pay-out. Ouch!

GAP insurance bridges this gap.

How does GAP insurance work?

Melissa loves her Volkswagen Polo; she’s even given her name, Poppy! Poppy is her pride and joy, but one day, through no fault of theirs, Melissa and Poppy are involved in an accident. The good news is, that Melissa it totally fine, the bad news is that Poppy is far from fine, in fact she has to be written off.

Cartoon of very sad looking car that's been in an accident

Melissa’s insurance company decide that Poppy’s market value is £6,000, but, to settle her finance agreement, Melissa needs £9,000.

So, Melissa is left with a £3,000 GAP between what her insurance company are going to pay-out for Poppy and the amount she needs to settle her finance agreement. This is very bad news, as Melissa is going to have to find the money to make up this shortfall and she still has no car.

The good news is that Melissa took out GAP insurance when she purchased Poppy, which means that her GAP insurance will pay out the £3,000 shortfall. Great news for Melissa, who doesn’t have to worry where she’s going to find £3,000 from; she can start again and buy a new Poppy (a bit heartless, but needs must)!

Happy cartoon car

Are there any downsides to GAP insurance?

Not really; of course, if you don’t have an accident resulting in a write-off you won’t use your GAP insurance; but, who wants to be involved in an accident? The thing is, if you are involved in an accident, GAP insurance ensures that you have much less to worry about and at a really difficult time, that’s got to be worth the extra cost.

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