Finance Gap Insurance (Shortfall Insurance) will pay the financial shortfall between the settlement amount received from your motor insurance policy and the amount you require to settle your finance agreement, in the event that your vehicle is written off.
Nine out of ten vehicles are now purchased using some form of finance such as Personal Loans, Hire Purchase agreements, PCP, and even Leasing and Contract Hire. As a result of this trend vehicle negative equity is on the increase as cars depreciate at a proportionally higher rate than the finance balance reduces, which is resulting in increasing numbers of consumers owing far more on their vehicles than they are worth.
How Finance Gap Insurance Works
If you have purchased your car using some form of finance you may be potentially exposed to vehicle negative equity (you may owe more that your car is worth). This will depend on three main factors:
- The length of your finance agreement?
- The rate at which your car depreciates?
- How long after your finance agreement started that your vehicle is written off
Show me an example
Let’s take a look at a common and typical scenario….
| Mr Jones buys a vehicle for an agreed inclusive price | £15,000.00 |
| He pays a deposit of | £ 1,000.00 |
| He finances with the dealer’s finance company the balance of | £14,000.00 |
| Financing at 5% per annum over 5 years the total interest payable is | £ 3,500.00 |
| On the day he drives away, Mr Jones owes the lender (more than he paid for the vehicle) | £17,500.00 |
| Sadly, after 24 months of happy motoring Mr Jones’s car is stolen and written off by his insurer. | |
| To settle his finance agreement on the car Mr Jones is required to pay his lender | £ 9,750.00 |
| But Mr Jones’s insurer will only pay | £ 7,500.00 |
| Mr Jones therefore needs to pay his lender the difference, just to clear his debt | £ 2,250.00 |
With a finance gap insurance policy, Mr Jones would receive £2,250 in order to settle his finance agreement.
Click here to compare finance gap insurance quotes
Other Types of Gap Insurance
There are other types of gap insurance that are based on the invoice price of the vehicle and also the replacement value.
Return To Invoice Gap Insurance (RTI Insurance) provides cover for the difference between the motor insurer’s valuation and the original invoice price of the vehicle. RTI Insurance is now the most popular type of gap insurance available due to the high levels of cover provided.
Click here to find out more about Finance Gap Insurance.
If you are looking for the maximum amount of cover possible a Vehicle Replacement Insurance policy will provide cover for the difference between the insurance company valuation and the cost of a new vehicle replacement. In some cases, an actual replacement vehicle will be provided on a new- for- old basis.
Click here to find out more about Vehicle Replacement Gap Insurance.
You can also check out our more detailed gap insurance product review fact sheets for the online gap insurance providers we recommend.
Click here to find out more information about Click4Gap
Click here to find out more information about Ala.co.uk
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