What Sort of GAP Policy Is Best If I Have a PCP?

When you have a personal contract purchase (PCP), your car’s value can drop due to depreciation and leave you potentially owing more than it’s worth if something goes wrong. If your car is written off or stolen, you could be stuck covering the gap between your insurance payout and your remaining finance balance. GAP insurance is the solution, as it can cover that gap for your PCP finance agreement — so you won’t be left with an unexpected bill after a total loss.

What Is GAP Insurance?

GAP insurance is a type of coverage designed to protect you if your car is written off or stolen, especially if you’re financing it through a personal contract purchase (PCP) or personal contract hire (PCH) agreement. It fills the difference between your car insurance settlement — often just the current market value of the vehicle — and what it actually costs to replace it with a similar model.

New cars can lose as much as a third of their value as soon as they leave the dealership, and standard insurance doesn’t cover that depreciation. So, GAP insurance helps cover the remaining balance if your insurer’s payout doesn’t fully settle what you owe on your car.

How Does GAP Insurance Work on PCP?

Here’s how PCP finance works together with car GAP insurance:

Let’s say you bought a car for £18,000 six months ago under a PCP deal, and you’ve been paying your monthly instalments as planned. One day, you find out your car has been stolen. After contacting the police, your insurer agrees to replace the car and offers £12,500 as its current market value.

However, the finance company still requires £17,000 to settle the agreement. With no GAP insurance, you’d be responsible for covering that £4,500 difference from your own funds. However, with GAP insurance, you can claim that £4,500 difference and avoid a financial burden for the car you no longer have.

Does PCP Include Insurance?

No, PCP agreements don’t usually include car insurance.

The PCP covers the cost of the car and your monthly payments, but you’ll need to sort out your own insurance. Finance companies usually require you to have comprehensive coverage, but it’s up to you to arrange and pay for it.

Do I Need GAP Insurance on PCP?

Here are reasons to consider GAP insurance on a PCP finance package:

• Protection from depreciation — New cars can drop in value by around a third within the first year; with EVs, it’s up to half. GAP insurance will make you less affected by that.
• Peace of mind — If the worst happens and your car is written off, having GAP insurance means you don’t have to worry about extra financial stress.
• Added security in riskier areas — If you live in an area with higher theft rates or spend a lot of time driving in accident-prone areas, GAP insurance gives you extra protection in case something happens to your car.
• Plan for an early upgrade — On a more positive note, if you want to trade in or upgrade your car before your PCP contract ends, GAP insurance will help you avoid any financial surprises when you settle the outstanding balance early.

What GAP Insurance Do I Need for PCP?

Now, let’s make sure you choose the right type to protect you from potential financial loss.

Here’s a simple example of the different types of GAP insurance. Imagine you bought a car a year ago, and unfortunately, it’s been written off. Here’s the scenario:

• Original car price: £18,000
• Deposit: £4,000
• Insurance payout: £10,500
• Outstanding finance balance: £14,500

Return to Invoice

The RTI policy is the classic GAP insurance. It brings you back to square one — covers the difference between your insurance payout and the car’s original purchase price. So, in this case, your car insurance company offers £10,500 after the write-off, but you originally paid £18,000. The RTI policy would cover the £7,500 gap between your payout and the original value, so you’d have a total of £18,000.

However, with £14,500 still left on your finance agreement, the RTI policy won’t cover that. After using the £10,500 from your insurance and £7,500 from your GAP policy, you’re left with £1,500. You’re still £1,500 out of pocket compared to your original deposit, but it’s far better than losing that £4,000 and still owing money on the finance.

Finance GAP

Finance GAP works a little differently. This type of policy focuses on covering the amount left on your finance deal, so if the amount you owe exceeds the car’s value, you’re covered. Here, your insurance payout is £10,500, but you still owe £14,500. The finance GAP policy would cover that £4,000 shortfall, which means you can settle your finance in full and walk away without any debt.

This doesn’t get you back the £4,000 you paid upfront, but it saves you from being stuck with a finance bill you can’t afford. It’s especially useful in the early months when your finance balance is higher than the car’s value due to interest.

Vehicle Replacement

Vehicle replacement GAP insurance policy offers the most comprehensive protection. It goes beyond the original car price and covers the cost of replacing your car with a similar one, which might have gone up in price. In this case, the car was originally worth £18,000, but the same model is now priced at £20,000.

Your car insurer pays out £10,500, but with a vehicle replacement policy, you’d get an additional £9,500 to cover the difference between your payout and the increased cost of replacing the car. This means after paying off the £14,500 finance, you’d have £5,000 left to put towards a new car.

Negative Equity GAP Insurance

If you’ve been financing your car for a while, you might have found yourself in a position known as negative equity. This happens when the amount you owe on the car is greater than its current market value, either due to depreciation or because you’ve taken out a large finance agreement.

Negative equity GAP insurance is designed to protect you if this situation arises — even if that balance is higher than the car’s value. For example, if your insurance company pays out £10,500, but you owe £14,500, negative equity GAP insurance would cover that £4,000 difference.

Combined Policies

Now, many GAP policies come as combined deals, which give you extra flexibility and the highest payout possible. These policies combine options from above — mostly the RTI or vehicle replacement with finance GAP. This means if your finance balance is higher than your insurance payout, you’ll get the full coverage for that. But if the invoice value of the car or the replacement cost is higher, that’s what you’ll receive.

What Doesn’t GAP Insurance Cover?

PCP finance GAP insurance is helpful but doesn’t cover everything. Here are some key things it typically doesn’t include:

• Damage repairs — GAP insurance policies won’t cover regular repairs or maintenance.
• Excess or deductibles — If your insurance policy has an excess or deductible, GAP won’t cover that amount; it’s up to you to pay.
• Non-financed cars — GAP insurance applies to vehicles with outstanding finance. If you own the car outright or have no outstanding finance, GAP insurance doesn’t apply.
• Modifications — If your car has been modified, whether it’s added accessories or tuning, GAP insurance won’t cover these enhancements.
• Loss of personal belongings — GAP insurance will cover the car but not any personal items inside it at the time of the accident or theft.

What Happens If I Don’t Have PCP GAP Insurance and My Vehicle Is Written Off?

If the insurer deems your car a total loss, you could end up stuck paying more than you expect. Your standard insurance will only cover the current value of your car, not what you originally paid for it, which is much lower than the amount you still owe on your PCP. Without GAP cover, you’ll need to cover that difference yourself.

How Much Is GAP Insurance on a Car?

The cost of GAP insurance varies depending on the coverage you choose, but it’s usually fairly affordable. We recommend shopping around to find the best price because there is a big difference between GAP insurance providers.

Keep in mind that car dealers can no longer offer you GAP insurance at the point of sale — they’re required to give you a minimum of two days to consider it. Also, GAP insurance from dealerships tends to be more expensive than policies you can find online.

How Long Does GAP Insurance Last?

PCP finance GAP insurance typically lasts anywhere from one to five years and aligns with the length of most finance agreements. It’s best to have your GAP insurance cover the full duration of your PCP contract, so you’re protected for as long as you’re paying off the vehicle.

How to Claim GAP Insurance

If you find yourself in a situation where you need it, claiming GAP insurance is a straightforward process. First, you’ll need to confirm the amount the insurer will pay out. This gives you the shortfall figure, which is the difference between your insurer’s payout and what you owe on your PCP agreement.

Remember to check your policy’s terms for any deadlines for submitting a GAP insurance claim. Once you have the shortfall amount, simply reach out to your GAP insurance provider by phone or email to start the claims process.

Final Words: Is It Worth Getting GAP Insurance on a PCP After All?

The answer depends on your preference and the cost of the policy. More extensive coverage with higher payouts comes with a higher price tag. For instance, a policy that covers both vehicle replacement and outstanding finance will be more expensive than one that just covers the finance, but it offers more financial protection if you need to claim. In any case, PCP finance GAP insurance can save you a lot of money if your car is written off or stolen, so it’s a smart choice for many drivers.