What is GAP insurance?
If you are financing your vehicle in any way where you have low or no deposit then you should understand the protection GAP provides.
GAP Insurance protects you from owing more money to your finance company than what your Motor Vehicle Insurance might pay out in the event of an accident, theft or damage that deems your vehicle a total loss.
For example: At the time your vehicle is deemed a write-off by your insurance company, you still owe $12,000 on your loan. Your motor vehicle insurer agrees to pay you $10,000 as part of your comprehensive insurance policy, leaving you $9,500 in the hand once your $500 excess has been deducted. This leaves you with a $2,500 shortfall to pay back your loan.
This shortfall can occur for a number of reasons, but is often due to the fact that a car's market value declines faster than the amount owing on the car is repaid. GAP has been designed specifically to cover this type of shortfall.
You should consider the protection GAP offers if ALL of the points below are relevant to you:
- You are borrowing money to purchase your vehicle
- You have no, or low deposit towards your new vehicle
- Your repayments will be over 3 or more years
If you are purchasing with hard earned cash, or have a large deposit towards your vehicle then GAP is probably an option you don’t need to consider.
Remember with GAP you will also need to have a comprehensive Motor Vehicle Insurance policy in place, although this is a requirement of most finance companies willing to lend money anyway.
There are various levels of cover in relation to the amount of shortfall that may occur. The value of your deposit, a vehicles purchase price and the amount you are financing will all determine the level of protection you are best to choose.
Some GAP policies also include additional benefits at the time of claim.