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What happens if you don't have GAP Insurance?

GAP Insurance is an optional addition to provide you a 'top-up' financial protection. It can only be claimed on IF your main motor insurer 'writes off' the vehicle as an uneconomic loss following an accident, fire, theft, etc. 

Of course, your main motor insurance will also provide you with some financial protection also. With fully comprehensive cover you would expect your settlement to give you the 'market value' of the vehicle at the time of loss. What happens if you do not have GAP Insurance?

As GAP Insurance is optional, what happens if you choose not to take out cover?

It is probably easiest to answer this by illustrating some examples. 

1. A vehicle bought outright (cash purchase)

 

Let's say you bought your vehicle outright (for cash, no lease or finance) at a figure of £25,000. 

If the vehicle was written off 3 years later then your motor insurer may only pay you the 'market value' at that time. Let's say that is £12,000. 

Without GAP Insurance you would simply have your £12,000 (less perhaps your motor insurers excess deduction). 

You can use this to replace your vehicle. If you wanted a new or newer vehicle then you would either have to dip into your savings or take out funding. 

If you have taken out a simple Return to Invoice Gap then this could have added a further £13,000 top-up to give you your original £25,000 back. 

So, in summary...

Without GAP Insurance you would have £12,000 towards your new car

With GAP Insurance you would have £25,000 towards your new car

2. Bought on finance (HP or PCP)

When you buy a car from a motor dealer, many times this is either done via a Hire Purchase agreement or a Personal Contract Purchase. Either may require a deposit to be paid and then monthly payments over a fixed term. 

With HP you simply pay until the end and the vehicle is yours. 

With PCP you have a final balloon payment to make. If you pay this then the vehicle is yours. 

Let's expand on the same example we used in the first example. 

You buy the vehicle for £25,000 but it is on a PCP finance agreement over 4 years.  

At the end of year three, the vehicle is written off. The motor insurer pays out the market value at £12,000.

You still have a financial settlement on the PCP of £14,000.

Without GAP Insurance you would need £14,000 just to clear the finance. The £12,000 from the motor insurer would leave you with £2,000 still left to pay. 

If you had a simple Return to Invoice Gap, as in the first example, this would top up the motor insurers settlement with another £13,000. 

This would allow you to pay off the finance at £14,000 and leave you £11,000 for a deposit for a new vehicle. 

So, in summary....

Without GAP Insurance you would need to find £2,000 to clear the finance and have no money to put towards a new car.

With GAP Insurance you can pay off the finance and have £11,000 towards the new vehicle. 

For more GAP Insurance information please check out our 2023 Complete GAP Insurance Guide

3. Taken on a lease or contract hire agreement with no option to own

Contract Hire or Lease agreements with no option to own are different from other types of motor finance. This is essentially because you cannot own the vehicle as a feature of the agreement. If the vehicle is written off then you cannot claim the purchase price back as you have not, and never will buy the vehicle for that amount. 

Instead, your liability is simply to pay off the lease if the vehicle is written off during the lease term. 

As your motor insurers settlement is limited to the market value of the vehicle at the time of the loss, this value is what they will provide to you. However, it may not be enough to pay off the lease at that time. 

A Lease and Contract Hire GAP policy can cover the shortfall between the motor insurers settlement and the lease settlement. 

You also have the option to protect the advanced rental payment (initial deposit payment) that you have paid on the lease. This is the first payment you make, often a multiple (3,6 or 9) or the monthly rental. 

If you opt for the 'deposit protection' cover then you can claim this back separately and use this as a deposit on your new vehicle. 

For example, let's say you secure a vehicle (valued at £25,000) on a 4-year lease, paying £250 a month and with 9 rentals upfront as a deposit. 

Let's suppose the vehicle was written off after year three. 

Again, using the figures from the previous examples, the motor insurer provides you with a market value figure of £12,000. 

You still owe £14,000 in the lease (which can be made up of the outstanding rentals and the residual value at that time). 

In this case, you would have no vehicle and still owe the leasing company a further £2,000. 

If you took out the standard Lease and Contract Hire GAP then this can cover the £2,000 shortfall highlighted above. 

If you also opted for the Deposit Protection option then this can cover the  £2250 initial deposit rental you paid. This would return this to you so you can use it as a deposit on a replacement vehicle. 

In summary.........

Without GAP Insurance you would need to find the shortfall on the lease of £2,000 before you can look to replace your vehicle.

With GAP Insurance the shortfall on the lease is cleared for you.

With GAP Insurance and Deposit Protection, the shortfall on the lease is cleared and you have your deposit back of £2250. 

So there you have it. Three typical situations and the financial consequences if you have GAP Insurance or not. Remember, GAP Insurance is not a legal requirement. Perhaps with the examples above to consider, you can see why many thousands of car buyers do protect themselves, just in case.