Anyone that buys a new or used car on finance is tied to a legal financial agreement that means they have to make the agreed payments to the finance or contract hire company, even if the car is involved in an accident soon after purchasing it and gets written off or if it gets stolen. Of course, this poses a problem for the car owner in that the vehicle depreciates in value very quickly, which means that the amount that you get from your vehicle insurer if your car is written off or stolen may be substantially less than you still owe on the vehicle. Also Purchasing a car warranty is one of the most effective ways to ensure peace of mind should your car break down due to electrical or mechanical failure.
How can gap insurance help?
You may hear the term 'gap insurance' referred to in a number of different ways, and some of the alternative terms for gap insurance include car depreciation insurance and Return to Invoice insurance, Back to Invoice Insurance, finance shortfall cover, and car depreciation cover. Basically, no matter which of these terms is used to describe the cover the main aim of gap insurance is to provide cover for the financial shortfall between the amount that you get back from your insurance company if your new or used car is written off and the amount that you paid, and may still owe to the finance company.
Imagine if your car was to be written off whilst you still owed a substantial amount on the finance for the vehicle. With the speed at which car prices and values depreciate the amount that you get back from your insurance company is likely to be a lot less than you owe on the vehicle, and in this event you could end up paying hefty instalments for a car that you no longer have. This financial commitment means that it could be very difficult to afford a new car replacement, which effectively means that you will have to find the money to pay off your car finance but you will no longer have a car or be able to afford a replacement vehicle.
Gap insurance cover is something that can provide peace of mind to those buying a new or used vehicle, especially for those that are reliant on their vehicles and would therefore struggle in the event that they no longer had access to a car and could not afford to buy a replacement vehicle. Having gap insurance cover ensures that even if your car does get written off after you have taken out finance to buy it you will not be left with a shortfall to cover if the amount that your insurer pays is less than the amount that you owe to the finance company.
It is important to remember that even if you have fully comprehensive car insurance on your vehicle you will only get the amount at which the insurance company values your vehicle at the time of the accident, and due to the way in which vehicles depreciate this will most likely be a lot less than you still owe on the vehicle, especially if the accident takes place quite soon after you get your new or used vehicle. Gap insurance basically ensures that the shortfall between the amount you get and the amount you owe is covered so that you don't personally have to worry about where the money to cover this 'gap' will come from.
The speed of car depreciation
The need for gap insurance cover arises because of the speed and level at which car values depreciate as soon as you drive them away from the showroom. If vehicles retained their value after bring driven away and only depreciated over time then many people would not need gap insurance cover. However, the fact is that car values depreciate right way when you drive them away from the showroom, which means that as soon as you hit the road you owe more money for your vehicle than the vehicle is actually worth.
Of course, this means that an accident could be devastating in terms of your finances, and no matter how careful a driver you are there are always other drivers on the road, as well as other things such as animals running across the road or a pedestrian running out, that could cause you to have an accident. So, even if you believe that you can avoid having an accident it is always best to have gap insurance cover in place because you simply don't know where or when an accident or incident could occur that could leave you without a vehicle but without ridding you of the debt for the vehicle.
Find the best level of gap insurance cover for your needs
It is important to look at the different types of gap insurance cover in order to find the cover that is going to be best suited to your needs as well as your budget.
Vehicle Replacement Insurance, for example, will provide you with a new equivalent car, which means that you get a replacement vehicle on a like for like basis, eliminating the worry of ending up with a replacement car of a much lower value due to car depreciation.
Return to Invoice cover is useful even for those that paid cash for their vehicle, as it means that the driver will get back the difference between the amount that was paid for the car and the amount that the insurance company pays out following depreciation, which means that the policyholder gets back the full original amount paid for the vehicle when it was purchased.