What is GAP Insurance?GAP insurance, or Vehicle Equity Insurance, is an optional type of car insurance when you borrow to buy a vehicle. This article explains how it differs from other types of vehicle insurance cover.
What is the purpose of GAP insurance?
If your car is written off in an accident, the payout from your car insurance company can often be less than the amount owing to the lender. GAP cover helps to protect you if your car is written off and you don’t receive enough other insurance money to pay out your car loan.
If your financed vehicle is written off, you usually need to pay out your loan in full immediately.
GAP insurance definition
GAP is an acronym for ‘guaranteed asset protection’.
Vehicle Equity Insurance
An alternative description for GAP insurance.
GAP car insurance coverage
GAP cover is best explained by using a couple of examples.
Let’s say you have a car that has a market value of $15,000 but you still owe $18,000 on your vehicle loan. You have comprehensive cover for the car’s market value, and your vehicle is then stolen and written off.
- If you don’t have GAP insurance, you will be out of pocket $3,000. That’s because you will only receive $15,000 from your comprehensive policy, but you will need to pay out your $18,000 loan immediately.
- If you do have GAP cover, it will cover the $3,000 shortfall between what your vehicle was worth ($15,000) and the $18,000 that you owe on it.
Let’s say you have the same car as Example 1, but are then involved in an accident where it is written off. The accident was not your fault. The other driver’s insurer will pay your vehicle’s market value ($15,000), not the $18,000 you owe on your loan.
- If you don’t have GAP insurance, you will be out of pocket $3,000.
- If you do have GAP cover, it will cover your $3,000 shortfall.
Do I need GAP insurance?
This is up to you. All secured car loan lenders mandate you have a comprehensive car insurance policy on your car, but GAP is optional.
GAP cover helps to give you peace of mind. If you buy a new vehicle, its value decreases almost as soon as you start driving it. Cars depreciate most in the first few years after they are produced.
It’s quite easy to get into a situation where you owe more than your car is worth in the early years of financing a vehicle.
If you borrowed all (or most) of the money to buy your car, taking out GAP cover makes sense. How else would you pay out your loan if you didn’t have it and your vehicle was written off?
Do you need GAP insurance if you have full coverage?
GAP cover is optional when you finance a vehicle. On the other hand, most vehicle financers require you to take out comprehensive car insurance to approve your finance.
Stand-alone GAP insurance
Most insurers sell stand-alone GAP policies and they are usually cheaper than you can get at car dealerships. You can also usually buy this insurance directly from an insurer as an add-on to a comprehensive policy. But GAP cover is usually only available for new cars.
Always shop around for any car insurance products to make sure you get the best deal. Better yet, get a broker to do it for you to save you time and hassle.
GAP insurance calculator
Your insurance premium will depend on a range of factors, including:
- how much you borrow,
- the type of car you buy,
- the value of the car you buy,
- your loan term, and
- any optional extras that are included in your GAP insurance policy (for example, the cost of a replacement vehicle or a temporary hire car).
The cost of your GAP premiums can be included in your vehicle finance to cover you for the full term of your loan. It’s best to speak to a car finance broker for advice.
Don’t speak to a car dealer about finance or insurance. If you do, you’ll pay too much.
Is comprehensive car insurance worth it?
Insurance is one of those products that seems like a waste of money – until you need to make a claim. Then it’s crucial.
If you’re borrowing to buy a vehicle, you don’t usually have any choice but to take out comprehensive cover. Otherwise you won’t get your finance approved. You just need to make sure you’re getting the best deal you can.
If your vehicle is written off, your insurer will pay your comprehensive insurance amount directly to your financer. You will get any amount (if any) left over. If there is any shortfall, your GAP insurance will cover it (if you have it).
When assessing comprehensive insurance, you generally get what you pay for. The budget policy providers often don’t provide things like phone-based claim support, choice of repairer, interim rental car, or new for old replacement. It’s important you read the policy particulars carefully when getting a car insurance quote.
How we can help
If you’re looking to get finance for a new car, talk to our expert brokers at Auto Car Loans. We’ll find you a great deal. We also have a number of insurance partners.
Don’t let yourself get talked into dealer finance at a car yard. If you do, you’ll probably end up paying more.
Call 1300 301 051 during business hours to get in touch with one of our experienced car finance brokers.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.