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What is gap insurance and do you need it for your car?

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If you’re purchasing a new car for the first time you might be recommended gap insurance by the car salespeople and you’re not really sure what it is.

In this article I will share what gap insurance is and whether you really need it.

What is gap insurance?

Unfortunately cars do not increase in value over time, but quite the opposite.  According to the AA a new car “will fall by 40% in the first year and up to 60% over three years on average”.

Literally as soon as you drive your brand new car off the forecourt, it’s value begins to depreciate.

A new car, therefore, is only an investment for you and your own personal life, not an investment that will increase in value over time.

Because of this, insurers will only cover your car for a much lower price than you have paid.  If you have a write-off accident 10 months after getting your new car, then they aren’t willing to pay out the full price you paid for the car as it won’t be worth that much anymore.

This means you’ll only receive the amount your insurer values your car at and not the original amount you paid.

This is where GAP insurance comes in.  It stands for Guaranteed Asset Protection and is an insurance that typically lasts from one to three years after the purchase of a new vehicle, bridging the ‘gap’ between what your insurer is willing to pay in the event of a write-off and the price you paid for the car originally.

The insurance will therefore insure you don’t lose money (bar the cost of the insurance) in the event of your brand new car being written off.

There are many insurers online offering gap insurance and you can do a price comparison at Protect Your Family to get an idea of gap insurance quotes if you’re purchasing a new car.

Do I need gap insurance?

Now, the big question.  Do you really need gap insurance or is the insurance itself just a waste of money?

If you are buying a used car then no, it’s probably not worth it if your car isn’t very valuable anyway.  Used cars also tend to depreciate at a slower value compared to new cars, so it really could be a waste of money.

However, if you are buying a brand new very expensive car then this is definitely worth researching as you could lose a lot of money should your car become a write-off in the first three years.  Just imagine all that money you’ve spent years saving for a new car, just to be wasted in the unfortunate event of an accident.

For example, after three years, a Citroen C-Zero (2011-) that cost £26,160 brand new and is driven 12,000 miles per year, might only be worth £4,950 (Source: Automotive data analysts CAP. November 2015.)

Obviously you might accept some monetary loss for usage value, but that’s still over £20,000 you could lose in three years if it is suddenly a write-off.  It’s a lot of money and getting gap insurance will ensure you won’t be out of pocket should your car be stolen or a write-off.

If you’re borrowing the money or getting the car on a type of finance that must be paid back, then it’s also worth considering.  Otherwise if the car is written off, then you’ll still be stuck paying back the full value of the car via the loan, even though you don’t have it anymore which could be super frustrating.

Final thoughts

Ultimately, the best thing to do is to research the new car you plan to buy and see how fast it depreciates in value.  Then ask yourself whether you’d be happy to accept that loss if your car becomes a write-off in three years.  If not, then get some quotes for gap insurance to see if they are affordable and worth the cost ‘just in case’.

Also, check your existing car insurance first.  Some have special new car policies that will replace a new car anyway within the first year, should it be written off.  In this instance, you wouldn’t need gap insurance too.  This is where it’s important to really check the insurance you already have in place for your car or to compare different car policies to see if you can avoid having to take out any additional policies like gap insurance.

Gap insurance really does depend on your individual circumstances and though it’s most useful for those buying expensive new cars that depreciate in value quickly, some people do buy it for used cars.  The best thing is to research the depreciation value of the car you are planning to buy and get some quotes for gap insurance to see if it’s worth it for your circumstances and finances.

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