How does GAP insurance work?
Guaranteed Asset Protection, or GAP Insurance as it is commonly known, is an important addition for any motorist. GAP Insurance protects you should the worst happen, and your car is stolen, declared a total loss or if your car is written off.
It is purchased as an optional extra alongside your traditional annual or monthly insurance but differs in the fact that it pays out the difference between the current market value of your car and the amount you paid for the car. This protects you against any unexpected losses made on the vehicle.
Why is GAP insurance different to comprehensive insurance?
If you were to have a crash, your insurer would only pay out for the market value of the car at the time of the accident – which is where GAP insurance comes into play and pays the difference.
It is important to remember that the market value of your car could be lower than the figure you still owe on finance. Without GAP insurance, you therefore may still be liable to make payments towards a vehicle that no longer exists. This is because your insurance pay-out will be for the market value only and may not cover the total amount you owe on the lease vehicle at the time of the incident.
The AA claim that a new car loses around 60% of its value after three years on the road, which highlights the importance of GAP protection. With a finance agreement, monthly payments are set for the term and therefore, particularly in the first few years of a vehicle's life, the vehicle's value will depreciate more than the amount you have paid off the agreement. Therefore, GAP insurance prevents drivers being liable to pay this shortfall in the event of a claim.