Guaranteed Asset Protection (Gap) insurance covers the difference between the amount you get from your insurer if your car is written off and what you paid when you bought it.
It might be offered by the dealership when you buy a car, but you can usually get a better deal by comparing policies and buying cover online.
Your finance deal or loan charges a high rate of interest
Your finance deal or loan is spread over a long period, e.g. five years
The deposit was small, or you have a large one-off payment to make at the end of the term
If this happens you could end up without a car, and still owe money to your finance company without any spare cash to buy a new vehicle.
Some cars depreciate faster than others, so it is worth finding out how quickly your car could lose value.
The fastest depreciating cars lose up to 60% of their value after a year, and over 70% after three years.
For example, If you write off a car you bought with cash for £16,000 after one year, and the value has depreciated by 60%, you will only receive £6,400 from your car insurer.
In this example you could claim on your gap insurance policy for the outstanding £9,600 to cover the loss in value.
Some car insurance policies offer replacement cover if your car is written off or stolen in the first year.
This means you would not need gap insurance in the first year.
Some gap insurers let you defer your cover for the first year. This means you take out the policy when you buy the car, but the cover only starts after 12 months.
However, you can only get some policies within three months of buying the car.
If you have enough money to make up the shortfall yourself, paying for a gap insurance policy may not be worth it.
Also, you only really need gap insurance if you want a brand new car to replace your current one if it is written off. If you are happy to buy a second-hand replacement you can use your insurance payout.
You can still buy gap insurance for a second-hand car, however it is less useful because used vehicles depreciate in value much slower than brand new ones.
For example, a three-year-old car might only depreciate in value by 30% in the first three years you own it, compared to up to 70% for a brand new vehicle.
There are four main types of gap insurance:
What it covers: The difference between the price you paid for your car, and the market value when you make a claim.
For example: You pay £16,000 for your brand new car. It is then written off a year later and your car insurance policy pays out the current market value of £10,000. Your return to invoice policy can then pay out the difference of £6,000.
Should you get it? This policy is based on the exact amount you paid for your car, so is a good option if you paid more than its market value when you bought it.
What it covers: The difference between the market value of your car when you bought it, and the market value at the time of the claim.
For example: You pay £16,000 for a new car with a market value of £18,000. If your car insurance pays out £10,000 when it is written off, you can claim £8,000 on your return to value policy even though you paid £2,000 less when you bought the car.
Should you get it? This policy does not take into consideration how much you paid for your car, so could be worth considering if you bought your car at a discount.
What it covers: It works in the same way as return to value cover, but it pays out the new market value of your car at the time of your claim.
For example: You pay £16,000 for a new car, but when it's written off the same model is worth £17,000 new. If your insurer pays out £10,000 for the current value, your vehicle replacement policy can pay out £7,000 so you can replace your car.
Should you get it? This is only usually available for brand new vehicles, and can be the most expensive because it often pays out more than the difference between your payout and how much you paid for your car.
What it covers: The difference between the amount you owe on a finance agreement and the market value at the time of the claim.
For example: You have £12,000 left on your finance agreement when your car is written off. If you receive £10,000 from your car insurer, your finance gap insurance will pay out £2,000 to cover the rest of what you owe.
Should you get it? You can only get this type of policy if you bought your car with a finance or lease deal. It will clear your debt, but you will not be left with any money to buy a new vehicle.
Gap insurance can cover the difference between what you paid for your car and what your insurer will pay out if it is written off.