| Gap insurance provides finance shortfall cover
For many of us buying a new, or almost new car, with (or without) a car warranty is possibly the second most expensive item we will ever purchase - a home usually being the most expensive.
It is logical that such a large purchase should maintain its value. With a home that is fine because house values tend to appreciate over time, making it a good investment, but a vehicle's value does the exact opposit - it depreciates with time. Your vehicle's value starts to depreciate the moment you drive it off the forecourt.
That is okay, most of us understand that and to ensure our car keeps its value for a long time we care and maintain it on a regular basis. We know that our car is going to be worth a lot less when we sell it but at least we have had some benefits from driving it. If money is a bit tight due to the downturn in the economy, the car is probably worth more to you in its current condition than to part exchange it.
But what happens if the car is a write-off or is stolen? Your insurance will only pay the book value at the time of loss which may be a lot less than its actual value to you.
Does insurance pay full value?
The simple answer is No! Normal car insurance, even fully comprehensive insurance, will not pay you back the full value of your car. Motor insurance will only pay the current market value for your vehicle.
When a vehicle is stolen, it is seldom recovered in the same condition you last used it. In fact, it is more likely to be written off. Car theft in the UK is the third largest crime with a vehicle stolen every minute. Nearly forty percent of all vehicles stolen are not recovered.
The only way to get full reimbursement for a wrecked or stolen vehicle is to buy gap insurance.
How Gap insurance works
Your car insurance will only pay the book value for your car at the time of loss which may be a lot less than its actual value to you. Gap insurance will pay the difference between the amount received from your insurance company and the original value of the car.
Imagine buying a car for £20,000 on credit. Eighteen months later the car is stolen and you still owe £12,000. The current market value is now only £9,500. The insurance company pays the current value but you still owe £2,500 to the credit company. Now you are out of pocket without a vehicle. Although car insurance will pay the current market value, it will not cover the financial shortfall you will incur if you still owe money on the vehicle. Gap insurance provides finance shortfall cover so you are not out of pocket.
Gap insurance pays the difference
Gap insurance will eliminate the risk of a financial
shortfall if your vehicle is lost or stolen and you will
be able to recoup your original investment. As in the example
above, Gap insurance finance shortfall cover will pay the
difference of £2,500.
There are several different types of gap insurance, including :
Return to Value Gap Insurance (RTV)
If your car is stolen or a total write-off due to an accident, Return to Value Gap Insurance pay you the difference between your cars value when you bought the policy and the current market value. In effect, Return to Value Gap Insurance acts as a car depreciation insurance should your car be a write-off.
Return to Invoice Gap Insurance
(RTI) If your car is stolen or a total write-off
due to an accident, Return to
Invoice Gap Insurance refunds the difference between
what you actually paid for it (the "Invoice Price") and
the depreciated value. New cars can depreciate by up to
77% over a 3 year period which means you would still be
paying for a car that is written off or stolen if you do
not any kind of finance shortfall cover such as gap insurance.
Vehicle Replacement Gap Insurance
(VRI) If your car is stolen or a total write-off
due to an accident, Vehicle
Replacement Gap Insurance will refund you the difference
between the payments you receive from your car insurance
policy and the cost of a replacement new vehicle, even if
the retail price has increased! This type of policy is ideal
if you bought a new car at discount or the cost of the same
car has increased.
Gap insurance is a worthwhile investment
A car is stolen every minute in the UK, over half a million cars are stolen or vandalized every year and almost as many are involved in accidents where the car is a write-off. While comprehensive insurance will pay you what the car is worth at the time it is written off, it does not cover the financial shortfall still owing to the finance company. If you still owe money on the car, you may have to pay the difference unless you have finance shortfall coverage.
Buying gap insurance ensures you will not be out of
pocket if your car is stolen or in an accident and is a
total write-off.
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