What Is Finance Gap Insurance?

The trouble with any form of Gap Insurance is that drivers are simply unaware of how important it is. This easy to read explanatory article has been written to help you to understand the importance of Finance Gap Insurance, avoiding the stereotypical insurance jargon.

Finance Gap Insurance, also known as Contract Hire Gap Insurance only applies to a vehicle which has been bought under a financial agreement, such as, contract hire, hire purchase or a lease purchase.

In the most simplistic explanation, Finance Gap Insurance is designed to allow the driver to walk away from a finance agreement with no liability if in the unfortunate case the vehicle is written off. When taking out a finance agreement for a vehicle, the only concern the driver involved has is ultimately paying the agreement off after the end of the agreed period.

When taking out a finance agreement, the majority of drivers are unaware that if in the unfortunate case the vehicle is written off, even if it through no fault of their own, they are still responsible for paying off the agreement.

For illustration purposes, Barry has bought a Honda Civic under a finance agreement which requires Barry to pay £200 for the next 24 months. However as a result of poor motorway maintenance, 12 months down the line, Barry is involved in an incident which writes his vehicle off, but thankfully leaves him unhurt.

So Barry is in theory still liable for 12 months of £200 payments, totaling £2400. Barry’s comprehensive insurer pays him £1200, leaving the outstanding £1200 still under Barry’s liability.

This is where Finance Gap Insurance comes into play. This policy would essentially pay Barry the remaining £1200.

Barry is now free from any financial liability.

Please note: Finance Gap does not reimburse any financial penalties which are as a result of late payments that occurred before your vehicle was written off.

Please note: Finance Gap cannot protect a loan shortfall if the agreement is not linked to a vehicle. For example, if it is instead linked to a Bank or a Personal Loan.

Please note: If your finance agreement involved you paying a large deposit, or if instead you paid for your vehicle by cash, this form of Gap Insurance is not for you.

Please consider Return to Invoice (RTI) or Vehicle Replacement Gap Insurance.

Again in the most simplistic terms:

Return to Invoice returns you to the original invoice price you paid for your vehicle if in the unfortunate case your vehicle is written off. If your comprehensive insurer pays you £10,000 and you originally paid £20,000 for your vehicle, then this policy would bridge the gap and pay you the outstanding £10,000.

Vehicle Replacement replaces your vehicle if in the unfortunate case your vehicle is written off. If you paid an invoice price of £20,000, and are informed that it has increased to £25,000, and your comprehensive insurer only pays you the £10,000, then Vehicle Replacement would pay you the outstanding £15,000 you need to purchase a vehicle of the same age, mileage, condition as you originally bought.

Finance Gap Insurance

Gap insurance, also known as Guaranteed Asset Protection insurance, is a type of insurance policy that covers the difference between what you owe on a car loan or lease and the actual value of your vehicle. It is designed to protect drivers from the financial loss that can occur if their vehicle is stolen, totaled in an accident, or damaged beyond repair.

When you purchase a new car, it begins to depreciate in value as soon as you drive it off the lot. In fact, the average new car loses about 20% of its value in the first year alone. This means that if you were to get into an accident or have your car stolen in that first year, you could end up owing more on your loan or lease than the car is actually worth.

This is where gap insurance comes in. Gap insurance can help bridge the “gap” between what you owe on your car loan or lease and what your car is worth. For example, let’s say you owe $25,000 on your car loan and your car is worth $20,000. If your car is totaled in an accident, your regular insurance policy may only pay out the current value of the car, which in this case would be $20,000. That means you would still owe $5,000 on your car loan. However, if you have gap insurance, it would cover that $5,000 difference.

Gap insurance is typically sold as an add-on to your regular car insurance policy, and it can be purchased through your insurance company, a car dealership, or a third-party provider. The cost of gap insurance can vary depending on several factors, such as the type of vehicle you have, your credit score, and the length of your loan or lease.

It’s important to note that gap insurance is not always necessary. If you put a large down payment on your car or have a short loan or lease term, you may not need gap insurance. Additionally, some lenders or leasing companies may include gap insurance as part of their financing packages.

Before purchasing gap insurance, it’s important to do your research and determine whether it’s the right choice for you. Consider the value of your car, the length of your loan or lease, and your ability to make up any financial gap on your own in the event of an accident or theft.

In summary, gap insurance can be a valuable insurance policy for those who are financing or leasing a car. It can provide added peace of mind and financial protection in the event of an accident or theft. However, it’s important to carefully consider whether gap insurance is necessary for your specific situation before making a purchase.

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