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.
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:
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.