Should you buy Gap insurance? Here’s how to decide

Buying a new car is exciting! But amidst the excitement of choosing colours and features, there’s an important decision that often gets overlooked and that’s Gap insurance. You might have heard the term, or perhaps your dealership offered it to you. But what exactly is it, and more importantly, do you need it? 

Here, we’ll take a look at what exactly Gap insurance is, why you need it and how find the best deals for you! 

What is GAP Insurance? 

Gap stands for Guaranteed Asset Protection. Essentially, Gap insurance is an optional insurance product that covers the gap between your car’s actual cash value and what you owe on it. This gap may rear its ugly head when your car has been declared a write-off or a total loss due to an accident or theft. 

Let’s take a look at how exactly this gap forms. Unfortunately, as soon as you drive your new car off the lot you start to lose money on it and it begins to depreciate rapidly. So, if your car is declared a total loss early on in your loan tern, your insurance policy will only pay out its current market value. 

This is typically less than what you still owe to the lender. That gap will then need to come out of your pocket and is not covered by standard auto insurance policies. 

Why the gap matters 

Imagine this scenario:

  • You buy a car for £30,000 with a loan.
  • Six months later, your car is unfortunately stolen and declared a total loss.
  • Your standard insurance policy determines that the car’s current market value is £24,000 and pays that out.
  • However, due to interest and depreciation, you still owe £27,000 on your loan.

Without Gap insurance, you’d be left paying £3,000 for a car you no longer own. Not only this, but you would still need to find money for a new car, leaving you with two expenses. 

So, do you need GAP insurance? 

If you’re struggling to find out whether or not you need Gap insurance, there are a few questions you can ask yourself. While Gap insurance can be a financial lifeline, it’s not essential for everyone, so here’s how you decide whether or not it’s for you:

  1. Did you make a small (or no) down payment?

If you put down less than 20% of the car’s purchase price, you’re more likely to owe more than the car is worth early on. This is a strong indicator that Gap insurance could be beneficial.

  1. Are you financing your car for a long term (e.g., 60 months or more)?

Longer loan terms mean slower equity build-up. The longer you’re paying off the car, the greater the chance that depreciation will outpace your loan payments, increasing the potential gap.

  1. Did you roll negative equity from a previous car loan into this one?

This is a major red flag. If you’re already starting with negative equity you’ll owe more than what your car is worth from day one, making Gap insurance highly beneficial. 

  1. Is your car a make/model known for rapid depreciation?

Some cars hold their value better than others. But, if your chosen car is known for significant depreciation, GAP insurance offers a valuable safeguard.

  1. Are you leasing your vehicle?

Many lease agreements include a form of Gap protection, anyways, but it’s always best to check your contract carefully. If gap protection is not included, or if you’re responsible for a specific lease liability, then separate Gap insurance might be necessary.

  1. Do you drive a lot of miles?

The more you drive the quicker your car’s value will decrease, potentially resulting in a wider gap. 

When you might not need Gap insurance:

But, are there any instances where you may not need Gap insurance? Most definitely, for example: 

 

  • You made a large down payment (20% or more), giving you a bigger buffer against immediate depreciation 
  • You plan to pay off your loan quickly
  • You bought a used car that has already depreciated significantly, meaning that the gap is a lot smaller with older or lower-value vehicles. 
  • If you have a healthy emergency fund and paying off a potential £3,000-£5,000 shortfall wouldn’t cause financial strain, you might choose to self-insure.

Now you can see that Gap insurance isn’t just another add-on to dismiss. For many new car buyers, especially those with small down payments or long loan terms, it’s a sensible financial decision that can save you from significant debt in an unfortunate event. 

So take a few moments to assess your financial situation and car purchase details as it could be the smartest £200-£400 you spend on your new vehicle.

Speak to Protect Your Family today to understand your options and secure the peace of mind you deserve. Gap insurance is a small investment that can provide significant financial security down the road, ensuring that an unfortunate event doesn’t leave you in a deep financial hole.