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Buying a new car on finance is an exciting step—but it also comes with risks that many drivers don’t fully consider. One of the biggest financial pitfalls is negative equity, a situation where you owe more on your car loan than the car is currently worth.
If your car is stolen or written off, you could be left with thousands of pounds in unpaid debt. Fortunately, GAP (Guaranteed Asset Protection) insurance is designed to help protect you from this kind of loss.
In this article, we’ll explain what negative equity is, how GAP insurance works, and which types of GAP cover offer the most protection for people in this situation.
What Is Negative Equity?
Negative equity occurs when the value of your car drops below the amount you still owe on your finance agreement. This is common in the first few years of car ownership, especially with brand-new vehicles, which depreciate quickly.
For example, imagine you purchased a car for £20,000 using a finance agreement. After a year, the car’s market value has dropped to £13,000, but you still owe £16,000 on your loan. In this case, you have £3,000 in negative equity.
If your car is declared a total loss—due to an accident or theft—your insurer will typically only pay you the market value (£13,000). You would still be responsible for the remaining £3,000 loan balance. That’s where GAP insurance comes in.
How Does GAP Insurance Work?
GAP insurance is designed to cover the financial “gap” between what your standard car insurance pays and either the original purchase price, the replacement cost, or your outstanding loan amount—depending on the type of policy you choose.
There are several types of GAP insurance, and each works a little differently:
1. Finance GAP Insurance
This is the most relevant type if you’re worried about negative equity. It covers the difference between your insurance payout and the outstanding loan balance. If you owe more on the car than it’s worth at the time of loss, this policy will step in to pay off the shortfall.
2. Return to Invoice (RTI) GAP Insurance
RTI pays the difference between the insurer’s payout and what you originally paid for the car. While this helps cover depreciation, it may not fully protect you if you already had negative equity—especially if your loan amount was higher than the vehicle’s purchase price due to rolled-over debt from a previous car.
3. Vehicle Replacement GAP Insurance
This type covers the cost of replacing your vehicle with a new version of the same make and model, even if prices have increased. It’s ideal for protecting against inflation or supply chain issues but isn’t specifically designed to address negative equity.
Does GAP Insurance Cover Negative Equity?
In many cases, yes—Finance GAP Insurance is specifically designed to protect you from negative equity. For instance, if your car is totaled and the insurance company pays out £9,000 while you still owe £12,000, a Finance GAP policy would cover the remaining £3,000, meaning you’re not left paying off a car you can no longer drive.
However, it’s important to note that not all GAP insurance policies cover rolled-over debt from previous finance agreements. If you carried a balance from an old car loan into your current one, you’ll need to read the fine print carefully or speak with a specialist to find out what’s included.
Why You Should Consider GAP Insurance
There are several reasons why GAP insurance can be a smart financial move, particularly if you’ve financed your vehicle:
Final Thoughts
GAP insurance can be a financial lifesaver for people financing a vehicle, especially if they’re at risk of falling into negative equity. While not every type of GAP insurance is suitable for every situation, Finance GAP offers the most direct protection against owing more than your car is worth. Before purchasing a policy, review your loan terms, check your vehicle’s current value, and speak with an advisor to make sure you’re choosing the right level of cover.
Need help deciding which GAP insurance is right for you? The team at Protect Your Family is here to offer expert guidance and help you secure the peace of mind you deserve on the road.
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