Finance gap insurance - and when not to buy it

How to choose the correct policy if you’re buying a car with a personal loan


Car finance gap policy
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Finance, lease and contract hire gap insurance is a policy designed to protect you against an unpleasant and expensive shock if your car is written off (or declared a ‘total loss’ in industry language) before you’ve paid off your car finance.

It’s bad enough if a car is badly damaged or stolen - but getting an additional bill from your lease or contract hire company makes the whole thing many times worse. Our finance, lease  and contract hire gap insurance pays the difference between your outstanding finance balance and your motor insurer’s settlement - ensuring that a bad event doesn’t leave you out of pocket.

However, it’s not necessarily the right insurance in all circumstances. If you’ve taken out a personal loan in order to buy your car - for instance from a bank or building society - it’s unlikely that this is the right policy for you. Instead, you should get a ‘return to invoice’ gap policy. We would advise a return to invoice policy for a used vehicle or either return to invoice or a vehicle replacement policy for a brand new vehicle.

Return to invoice gap insurance will pay the difference between the motor insurers settlement and the price you paid for your car so that you end up with the full invoice value of your car (a sum of money which should ensure that any outstanding loan repayments can be covered). With vehicle replacement insurance there is the added benefit that the gap payment will increase to cover the difference between the insurance settlement of the written off vehicle and the value of a replacement vehicle of the same specification (even if the cost has gone up in the interim). 

Why the difference?

Car finance is secured against the vehicle - so if you don’t keep up with payments the car can be recovered by the finance company. If something happens to the vehicle you have to tell the finance company - and you will have obligations in your finance agreement that you have to stick to. Finance, lease and contract hire gap insurance is specifically linked to this agreement and ensures you are covered.

A personal loan is (usually) unsecured - so if you don’t keep up with payments the lender will not have a claim on a particular asset. So if the car you took out the loan for is written off, you don’t have to tell the loan company - but you will have to keep paying off the loan or settle it in full. 

Defaulting on a loan has serious consequences which can take a long time and be expensive to sort out. However, between a comprehensive motor insurance policy and return to invoice or vehicle replacement gap insurance you will be covered to repay the loan in full.

Whichever way you buy a car, you can be covered. If you’re concerned about getting the right policy, it’s a good idea to give us a call and talk it through.


By Beate Kubitz at 31 Aug 2019, 00:00 AM