Deferred gap insurance

I have a year of replacement vehicle cover for my new car - how many years gap insurance do I need?

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We sometimes get questions from customers along the lines of: 

‘If I would like GAP insurance to cover the whole duration of my PCP finance agreement - 4 years - and my insurer will replace new for old for my first year - how many years cover do I need to specify?’

This is potentially a way to save money, so we always check people have considered the details and how ‘new for old’ insurance in the first year would work.

The idea behind this is that new cars lose a big chunk of their value the instant you drive them off the forecourt, so if you were involved in an incident and the car ‘written off’ early on, you would face quite a considerable difference between the price you paid and the value of the vehicle. The insurer is trying - generously - to stop this being an issue by offering you a new replacement vehicle. It’s probably a good deal from the insurer’s point of view as trade purchases are at a discount so you will get a car and it will cost about the same as the cash you would have been offered previously. Also, you have a new car. In theory, everyone is happy.

However, you should still be aware of some of the pitfalls of this offer. Firstly, your original car belongs to your finance company so they will have to accept a replacement vehicle (not the one they originally issued the finance on) at the end of the term. If not, things could get complicated. Potentially you may need to sell it at the end of your term and hope that the sale will pay off any obligations.

The other issue is that whilst it is likely to work pretty well for common models of common brands, it’s not going to work for run out models (i.e. in their last year of production) or hard to source vehicles with long waiting lists. If the insurer can’t get a new replacement vehicle, it will revert to offering you a payment to cover your loss - which may not cover a new car or settle your finance.

In some cases it’s pretty clear that it’s not going to. If you put down a £1,000 deposit on a £46,000 car, you are likely to agree to pay around £53,000 over the term of the finance (including interest). A total loss in the first month - during the insurer’s replacement vehicle offer period - would leave you with most of the finance outstanding. If the insurer couldn’t get hold of a replacement car they will offer you a cash payment - and whilst that is likely to reflect the value of the car it is unlikely to cover all the outstanding finance so you will probably have a gap of upto £7,000 to cover.

Obviously if your insurance and finance is with the manufacturer then they (should) have all the possible replacements available and their ‘replacement with new’ offer is pretty much copper-bottomed.

That’s the long answer. The short answer to the question is 3. 

If you’re happy that your insurer’s replacement in the first year is straightforward and you won’t be caught out, and you would like gap insurance to cover the full term of a 4 year PCP you need to get 3 year GAP cover deferred for the first year. This will add up to the full 4 years of your finance agreement.

by James Cartwright at 21 Nov 2019, 00:00 AM