updated July 26, 2022
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Reading: What is gap insurance car
It’s hard enough trying to navigate the world of auto financing without adding more to the mix.
If you need to pay off your financing before the term is up, guaranteed asset protection (gap) insurance can help bridge the gap.
In this article we will cover:
- what is gap insurance?
- How does deficit insurance work?
- Do I need differential insurance?
- is gap insurance worth it?
- what are the different types of differential insurance?
- negative equity gap insurance
- return to value (rtv) gap insurance
- How much does differential insurance cost?
- How long does gap insurance last?
- what are the best gap insurance providers?
- how to claim differential insurance
what is differential insurance?
Many people today choose to purchase a vehicle using a variety of terms and payment arrangements, rather than paying the full amount up front. Two of the most common methods of financing a new car are Personal Contract Leasing (PCH) and Personal Contract Purchase (PCP).
As with any vehicle used on public roads, you should make sure you have insurance that covers you for a minimum of damage to third parties and that it is appropriate for your use, whether social, domestic and pleasure, travel or business.
If you are purchasing through a PCP or PCH arrangement, then Collateralized Asset Protection (Gap) Insurance is a sensible and prudent option.
Gap insurance is exactly what it sounds like, i.e. it covers the gap between how much you could receive from your insurance company in the event your vehicle is written off and the actual amount it costs to replace the car. .
When determining the value of your vehicle during a replacement claim, insurers may only pay the current market value, rather than the “as new” replacement price. According to the AA, new cars lose a third of their value once they leave the forecourt.
gap insurance will cover the difference between your insurance payment and the cost to replace your damaged or stolen vehicle.
how does differential insurance work?
Imagine this: Eight months ago, you bought £20,000 worth of a car on a pcp deal, for which you pay a monthly amount. everything is going well. however, one morning you go downstairs and see that your car has been stolen. you call the police and then you call your insurers. The insurance company finally agrees to replace his car, giving its current market value of £14,000, but the finance company has given a figure of £20,000 for the full settlement of the settlement.
It is at this point that, if you have taken out gap insurance, you can simply call them and claim the £6,000 difference.
Do I need differential insurance?
Unlike auto insurance, differential insurance is optional and not required by law. however, if the worst happens and your vehicle is stolen or damaged beyond economic repair, gap insurance could help avoid unwanted debt or money problems.
When considering whether or not you should get gap insurance, your answer will depend on your circumstances. If you’re satisfied that your savings or other sources of funding will cover the shortfall, you may not need shortfall insurance.
If, on the other hand, you’re worried about whether you could find that amount of a shortfall, then gap insurance can give you peace of mind.
is differential insurance worth it?
As with any insurance, you should weigh the odds of needing to use it against your own personal financial situation. hsbc research shows that nearly a quarter of british people have savings of less than £250. If you can relate to this, then you will surely want to consider gap insurance.
what are the different types of differential insurance?
When looking at gap insurance, you’ll find there are three main types to consider.
Bill return gap insurance will cover the difference between how much your insurance company currently values your car and how much you originally paid for it or how much you owe the car rental company.
rental gap insurance will cover anyone on a pch agreement, for monthly payments for the remainder of the term. regular auto insurance will cover the cost of replacing the stolen or damaged vehicle.
Vehicle replacement gap insurance pays you the difference between what the insurer will pay you and what you would pay if you bought the car new today or, if it was a used car, its original price.
negative equity gap insurance
This can happen if you partially traded in your old car with existing financing at the beginning of the current financing agreement. You will have effectively transferred the old debt to the new agreement. Other types of gap insurance may not cover past debt that has been rolled over, while negative equity gap insurance will.
return to value (rtv) differential insurance
This form of gap insurance is similar to return-on-bill insurance (RTI), except it helps you finance the difference between what your insurance company pays and the market value of your car when you bought it. this is especially suitable for second-hand cars purchased through a financing arrangement.
So if you’re wondering if differential insurance will replace your car, the answer will depend on which of the above types of coverage you’ve purchased.
how much does differential insurance cost?
This largely depends on the type and extent of coverage you need, and it’s always worth shopping around to get the best deal. car dealers and salespeople can no longer sell you differential insurance when you buy your car; they have to give you at least two days after the sale.
You should look online, as research by a money-saving expert found that differential insurance policies sold through dealerships were significantly more expensive than those found online.
how long does gap insurance last?
You can typically purchase spread insurance for one to five years, which is the length of many financial agreements. Ideally, your insurance lasts for the duration of your financing.
what are the best gap insurance providers?
A plethora of differential insurance companies have appeared on the market, making it difficult to know what to look for and which one to choose. To help you select the right policy and provider for your circumstances, you should consider the following in your search:
the duration of the policy
the excess and the exclusions of the policy
the cancellation terms
reviews from past and current clients
It’s also worth discussing the various policy options with a financial advisor.
how to claim differential insurance
In the unfortunate event that your vehicle is stolen or damaged beyond repair, you need to know how to claim gap insurance.
First, you’ll need to file your claim through your vehicle’s insurer so that you can inform your gap insurance provider of the amount of the gap.
Be sure to check your terms and conditions for any time limits for claiming. Once you know the required gap amount, call or email your gap insurance provider to file a gap insurance claim and begin the claim process.
If you found this article helpful, you may also find our article on commercial auto insurance informative.
If you’d like more advice on finding the right differential insurance policy for your circumstances, unbiased has 27,000 independent financial professionals across the country ready to help.
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