Does GAP insurance settle outstanding finance?

GAP insurance isn't always what it seems when it comes to understanding how it will deal with your Finance Agreement secured on your vehicle.

Back in the day, the original form of GAP insurance was what's now referred to as "Finance GAP insurance". Its intention was that if your vehicle was written off and you owed more to the finance company than the motor insurer was paying out, the GAP insurance policy would step in to cover the shortfall. In theory, the best outcome would be that you'd be left in a cash neutral position: no car (obviously), but no debt either. Free to start again.

But what if you'd paid a lump sum upfront as a deposit? You might have no car and no debt sure, but you've also got to now find another lump sum to pay upfront again.

Enter: Invoice GAP insurance

If your vehicle is written off, a standard Invoice GAP insurance policy would be aiming to pay the difference between your motor insurer's valuation of the vehicle and the original invoice price that you bought the vehicle for. The theory being that if your motor insurer's valuation of the vehicle was topped up to your original invoice price most people should be left in a position of being able to settle any finance outstanding and have at least some money left over to put towards their next car.

It's not guaranteed though. For example if you put little or no deposit down, the interest rate was high and you financed the vehicle over a long(er) period of time (or any combination thereof), and your vehicle was written off very early in to that finance agreement, it's not impossible that the settlement figure of your finance agreement at the time of claim could actually be more than the original invoice price of the vehicle itself. In which case, a standard Invoice GAP insurance policy would leave you short.

Step forward: Combined Invoice GAP insurance

A combined policy like ours, is both Finance and Invoice GAP insurance in one. If your vehicle is written off, this type of cover aims to pay the difference between your motor insurer's valuation of the vehicle and the higher of either the amount outstanding on finance at the time of claim or the original invoice price that you bought the vehicle for. The best of both worlds, as some would say.

It doesn't stop there though...consider, you may have bought your original vehicle brand new and been the first registered keeper. In the time that you owned the vehicle before it was written off, the cost of a brand new equivalent may have increased. Where's the extra money coming from?

Take a bow: Replacement GAP insurance

This type of cover is the cream-of-the-crop. Combining Finance & Invoice GAP insurance with a policy that also covers the amount by which the cost of an equivalent brand new replacement vehicle might have increased by the time of claim.

The theory being that by topping up the motor insurer's valuation of the vehicle to the cost of replacing the vehicle with a brand new equivalent, most people would be left in a position to not only be able to clear outstanding finance and have some money left over but, more specifically, more money left over than you'd have had with just an Invoice GAP insurance policy (combined or otherwise).

What about cash buyers?

There's an argument that those who buy their cars cash outright have a greater need for GAP insurance.

Consider... you buy a brand new car cash outright for £20,000 and two-years later it's written off with your motor insurer paying you only £12,000 and - adding insult to injury - a brand new equivalent is now £22,000. Would you be satisfied having just the £12,000 paid out by your motor insurer to buy a new car with, or would you prefer to have an Invoice GAP insurance policy top that up to the £20,000 you originally paid or, better still, a Replacement GAP insurance policy top it up to the now £22,000 cost of a brand new equivalent?

Indeed. Why wouldn't a cash buyer have GAP insurance?

In summary

Subject to the policy terms, conditions and exclusions, GAP insurance certainly aims to clear finance outstanding on the vehicle at the time of claim but, it's also designed to go beyond that if/when possible subject to the type of cover that you purchase. Below is an outline of how each of our policy types function: