Guide
GAP insurance explained: do I need it when buying a car?
Guaranteed Asset Protection (GAP) insurance may sound tempting, but is it worth signing up for?
Words by: Andrew Woodhouse
Last updated on 31 July 2024 | 0 min read
Market update: some GAP insurance sales have been paused for an FCA investigation
Many insurance firms have agreed to pause selling GAP insurance while the Financial Conduct Authority (FCA) investigates whether the insurance provides "fair value" to those who buy it.
This investigation started in February and remains ongoing, though the FCA has given some providers permission to sell GAP insurance again as these providers have demonstrated they provide fair value, in line with FCA rules. We’ll update this article as the investigation continues.
This investigation started in February and remains ongoing, though the FCA has given some providers permission to sell GAP insurance again as these providers have demonstrated they provide fair value, in line with FCA rules. We’ll update this article as the investigation continues.
What is GAP insurance?
GAP insurance, or Guaranteed Asset Protection insurance, covers the difference in value between the price you paid when buying the car, and what it’s worth in the event of a total loss claim.
In the event of a ‘total loss’ claim (in which the car is stolen or written off), insurance providers normally pay the current market value of your car. This means drivers could be left with a shortfall, owing more in finance than the car is worth at that point. New cars can quickly depreciate in value over the first couple of years – losing anything between 15% and 35% of their value in the first year, and anything up 60% of their value in the first three years. So GAP insurance covers the difference in value between the price you paid when buying the car, and what it’s worth in the event of a total loss claim. Depending on the type of GAP insurance you choose, it can pay out the amount needed to get you back up to 100% of the original value rather than the current, depreciated market value.
In the event of a ‘total loss’ claim (in which the car is stolen or written off), insurance providers normally pay the current market value of your car. This means drivers could be left with a shortfall, owing more in finance than the car is worth at that point. New cars can quickly depreciate in value over the first couple of years – losing anything between 15% and 35% of their value in the first year, and anything up 60% of their value in the first three years. So GAP insurance covers the difference in value between the price you paid when buying the car, and what it’s worth in the event of a total loss claim. Depending on the type of GAP insurance you choose, it can pay out the amount needed to get you back up to 100% of the original value rather than the current, depreciated market value.
Is GAP insurance worth it?
GAP insurance isn't essential as your car insurer should already pay out for a replacement car of a similar age and condition. Just remember the car’s value drops in the first few years, so the standard insurance payout would reflect the depreciated value.
If you’re paying for a car on finance, or leasing a car, then GAP insurance may be worth considering – especially if you owe more to the finance company than you'd get from the insurance company in the event of a write-off or theft. Take your time to research properly before buying any finance or insurance product. You can consult free, impartial sites like MoneyHelper and Citizen’s Advice for guidance on personal finances.
If you’re paying for a car on finance, or leasing a car, then GAP insurance may be worth considering – especially if you owe more to the finance company than you'd get from the insurance company in the event of a write-off or theft. Take your time to research properly before buying any finance or insurance product. You can consult free, impartial sites like MoneyHelper and Citizen’s Advice for guidance on personal finances.
Should I get GAP insurance?
To help you decide if GAP insurance is right for you, ask yourself these questions:
• Are you buying a new car on finance? • Is your finance deal long-term? • Did you pay a small deposit on your finance deal? • Are you paying a high rate of interest on your finance deal? • Does your car lose value quickly? • Do you have a big lump sum to pay off at the end of your finance deal? • Is your car under ten years old and bought from a VAT-registered dealer? • Do you lack the savings to cover the gap between your insurance payout and the remaining finance balance in the event of a total loss?
• Are you buying a new car on finance? • Is your finance deal long-term? • Did you pay a small deposit on your finance deal? • Are you paying a high rate of interest on your finance deal? • Does your car lose value quickly? • Do you have a big lump sum to pay off at the end of your finance deal? • Is your car under ten years old and bought from a VAT-registered dealer? • Do you lack the savings to cover the gap between your insurance payout and the remaining finance balance in the event of a total loss?
You probably don’t need GAP insurance if:
• You made a large down payment and owe less than the car's value.
• You can afford to cover the gap out of pocket if your car is written-off or stolen. • Your loan term is short, reducing the risk of negative equity. • Your comprehensive auto insurance includes new car replacement coverage.
• You can afford to cover the gap out of pocket if your car is written-off or stolen. • Your loan term is short, reducing the risk of negative equity. • Your comprehensive auto insurance includes new car replacement coverage.
GAP insurance might be useful if:
• You financed most or all of the car's purchase price.
• You have a long-term loan or lease agreement. • You drive a high-depreciation vehicle. • You would struggle to pay the gap between the insurance payout and your loan/lease balance.
• You have a long-term loan or lease agreement. • You drive a high-depreciation vehicle. • You would struggle to pay the gap between the insurance payout and your loan/lease balance.
What are the main types of GAP insurance?
There are three main types of GAP insurance:
• Finance GAP insurance, which will pay the finance company enough to cover your debt. • Return-to-invoice insurance (also called a back to invoice insurance), which tops up the insurers’ payment to what you paid for the car in the first place. • New Car GAP insurance, which will pay you enough to buy an equivalent car to the one you lost. The specific terms of the policy will vary depending on the provider, but most will have a limit of how much they will pay of a shortfall. Some policies also cover the cost of your insurance deductible, while others cover the cost of any unpaid balances on your loan or lease, so you won't be responsible for paying the difference. Some contracts also offer extended coverage, which goes beyond the initial term of your loan or lease and can be helpful if you plan to keep your car for an extended period of time. When you buy a GAP insurance policy, you'll typically pay a one-time fee that covers the cost of coverage for the duration of your loan or lease.
• Finance GAP insurance, which will pay the finance company enough to cover your debt. • Return-to-invoice insurance (also called a back to invoice insurance), which tops up the insurers’ payment to what you paid for the car in the first place. • New Car GAP insurance, which will pay you enough to buy an equivalent car to the one you lost. The specific terms of the policy will vary depending on the provider, but most will have a limit of how much they will pay of a shortfall. Some policies also cover the cost of your insurance deductible, while others cover the cost of any unpaid balances on your loan or lease, so you won't be responsible for paying the difference. Some contracts also offer extended coverage, which goes beyond the initial term of your loan or lease and can be helpful if you plan to keep your car for an extended period of time. When you buy a GAP insurance policy, you'll typically pay a one-time fee that covers the cost of coverage for the duration of your loan or lease.
Benefits of GAP insurance
The main benefit of GAP insurance is that it can prevent you from owing money on a car that has been written off.
GAP insurance is most relevant to people paying for a new car on finance, but GAP insurance is available for anyone buying a car which is under ten-years-old from a VAT-registered dealer. If you opt for GAP insurance, it’s often easy to add it onto your loan or lease. If you don’t have GAP insurance, you might end up owning more than the car is worth in a few cases, for instance if: • you only paid a small deposit on a finance deal • your car loses value quickly • you’re paying a high rate of interest • you have a long finance deal, or • you have a big lump sum to pay off at the end. Of course, this could all apply to contract hire deals and finance deals. There’s a peace of mind that comes from knowing you’ll be protected, and that your out-of-pocket expenses are reduced. There are, however, drawbacks and risks associated with GAP insurance.
GAP insurance is most relevant to people paying for a new car on finance, but GAP insurance is available for anyone buying a car which is under ten-years-old from a VAT-registered dealer. If you opt for GAP insurance, it’s often easy to add it onto your loan or lease. If you don’t have GAP insurance, you might end up owning more than the car is worth in a few cases, for instance if: • you only paid a small deposit on a finance deal • your car loses value quickly • you’re paying a high rate of interest • you have a long finance deal, or • you have a big lump sum to pay off at the end. Of course, this could all apply to contract hire deals and finance deals. There’s a peace of mind that comes from knowing you’ll be protected, and that your out-of-pocket expenses are reduced. There are, however, drawbacks and risks associated with GAP insurance.
Drawbacks and risks of GAP insurance
GAP insurance isn’t suitable for everyone – take the time to read through the details and decide whether it’s right for you.
• GAP insurance is typically suitable for new or nearly new cars bought with a loan or lease. If you have a low loan balance or your car outright, you won’t need it. • GAP insurance can be expensive, especially if you buy it through a dealership, so shop around and compare prices to find the best deals if you want coverage at all. • If you’re buying on finance, check whether the contract offers similar coverage. • Check your insurance policy too, some contracts provide a ‘new car replacement’ during the first year. • GAP insurance may only offer limited coverage, only covering the amount owed on your lease or loan, not repairs or replacement parts, upgrades added after purchase, unpaid premiums, or any agreed below-market value balances.
• GAP insurance is typically suitable for new or nearly new cars bought with a loan or lease. If you have a low loan balance or your car outright, you won’t need it. • GAP insurance can be expensive, especially if you buy it through a dealership, so shop around and compare prices to find the best deals if you want coverage at all. • If you’re buying on finance, check whether the contract offers similar coverage. • Check your insurance policy too, some contracts provide a ‘new car replacement’ during the first year. • GAP insurance may only offer limited coverage, only covering the amount owed on your lease or loan, not repairs or replacement parts, upgrades added after purchase, unpaid premiums, or any agreed below-market value balances.
What does GAP insurance cover?
The difference between your comprehensive auto insurance payout and the remaining balance on your loan or lease.
The shortfall if your vehicle is written off or stolen and you owe more than the insurance settlement. You’ll often find that the following are excluded: • Repair costs • Payout if your car isn’t a total loss • Deductibles from your primary insurance • Any negative equity from a previous car loan
The shortfall if your vehicle is written off or stolen and you owe more than the insurance settlement. You’ll often find that the following are excluded: • Repair costs • Payout if your car isn’t a total loss • Deductibles from your primary insurance • Any negative equity from a previous car loan
Regulatory information
The Financial Conduct Authority (FCA) has set rules to help you make better decisions about GAP insurance.
You will receive clear information explaining the total cost of GAP insurance, benefits, limitations and features of the policy, and other details, so you can make an informed decision. You should receive a four-day deferral period, so people you’re not learning about GAP insurance and buying it on the same day. Take the time to research properly and decide if it’s right for you. You get a “cooling off” period in which you can cancel without any issue. Check your contract for details on this. If you do decide you want GAP insurance, remember you don’t have to buy it as part of your car finance package, and it’s absolutely fine to buy it separately.
You will receive clear information explaining the total cost of GAP insurance, benefits, limitations and features of the policy, and other details, so you can make an informed decision. You should receive a four-day deferral period, so people you’re not learning about GAP insurance and buying it on the same day. Take the time to research properly and decide if it’s right for you. You get a “cooling off” period in which you can cancel without any issue. Check your contract for details on this. If you do decide you want GAP insurance, remember you don’t have to buy it as part of your car finance package, and it’s absolutely fine to buy it separately.