Confused about GAP insurance

regency_man

I'm confused about the impact of finance agreements on GAP insurance. I'm looking at getting 'Vehicle Replacement' cover for my new car, which is on a 3 year PCP deal.

So, let's say the car is worth £50,000. After two years, I have a write-off accident and the car is valued at £30,000 but I owe the finance company £35,000. £5000 shortfall :eek:

My understanding is that Vehicle Replacement means my normal insurer will pay £30,000 and the GAP insurance provider will work with the dealership to provide a brand-new same-spec model of the car - essentially providing £20,000 towards the cost (or more if the price of new vehicles has gone up).

Fine. But now what happens with the finance company? I owe them £35,000 and thanks to the two insurances, I have an asset in my possession worth £50,000.

Does the new car transition into the PCP deal on the original terms? So I'd carry on paying the same monthly amounts for the 3rd year and the same original 'balloon payment' but at that point I'd have a 1 year old car instead of a 3 year old car, so it will be worth a lot more than the 'Guaranteed Future Value' which the finance company worked out on a 3 year deal.

Lets say my GFV (i.e. final balloon payment) on the 3 year deal is £28,000. But as the vehicle in my possession is only 1 year old thanks to the GAP cover, so it's worth £40,000 on the second hand market. At this point can I sell the vehicle and pay off the balloon payment and the £12,000 difference is mine to keep?

OR will the finance company insist on an immediate settlement of the outstanding amount when the vehicle covered by the PCP is lost? Which means I'd have to immediately sell the lovely new vehicle the two insurances have bought me, pay the finance company off, take the difference and hopefully be able to afford another PCP deal on yet another new vehicle?!

Seems so convoluted...

rich13348

From what I'm aware, but may not be correct, GAP insurance will pay either the purchase price of the vehicle, or what is left to pay on finance whichever is higher. To that end, and again I could be wrong, is the finance is paid in full and you own the vehicle.

daveyjp

If the car is written off the PCP will need paying in full to end the agreement.

They will then start again.

Far easier to sets your sights lower, buy a cheaper car so you are never in negative equity.

WellKnownSid

No, the finance house won't let you carry on when the vehicle the finance is secured on is now a cube of metal in a recycling centre. The guaranteed future value doesn't apply when it's turned into a set of gardening tools. You'll need to pay up, which is when the gap insurance kicks in.

There are different types of gap insurance - which determine where you are on the spectrum of "enough to pay the finance house off so they don't come round and break your legs", "enough to buy out the lease based upon the invoice value so they don't come round and break your legs" and "having enough left over to buy a replacement car without you being financially out of pocket, overall".

regency_man

I'm still confused.

The wording of the GAP policy doesn't suggest there is a way to get cash out of this to pay off the PCP - it specifically says they will pay direct to the dealership to fund a replacement vehicle.

Is the implication then that the settlement of the PCP has to come from me directly? Either I have to pay it off myself, refinance it myself or sell the replacement vehicle to pay off the PCP?

On receipt of satisfactory evidence that Your insurer has settled a Total Loss claim for the Motor Vehicle under Your Motor Insurance Policy
during the Cover Period, We will on behalf of the Underwriter:
1. credit the supplying motor dealer, as pre-authorised by Us, with the difference, up to the Maximum Benefit shown in the Schedule between
the settlement You receive from Your Motor Insurance Policy and the Replacement Cost of the Motor Vehicle, with a either:
ii) a new Motor Vehicle of the same model and specification as the original Motor Vehicle, or
iii) a Motor Vehicle of similar age to that of the Motor Vehicle when it was purchased by You if the Motor Vehicle was not
new when purchased, or
iv) the Outstanding Finance Balance owed on Your finance Agreement, whichever is the greater following a Total Loss.

rich13348

See (iv) basically the insurance payment and the GAP combined will pay off the finance, leaving you free from any finance, leaving you free to take another loan out. If you write off a car that is under finance the normal insurance payment goes to the owner of the vehicle, in your case the finance company. If the insurance pays off the finance in full, the GAP will cover the difference between the market value and the purchase price.
(ii) and (iii) relate to if you own the vehicle outright. Hope that clears it up.

regency_man

rich13348 wrote: »

See (iv) basically the insurance payment and the GAP combined will pay off the finance, leaving you free from any finance, leaving you free to take another loan out.
(ii) and (iii) relate to if you own the vehicle outright. Hope that clears it up.

If that's the case then there is no benefit in choosing a 'Replacement Vehicle' GAP policy over a regular finance settlement GAP policy. Sounds like the whole industry is a sham.

rich13348

I'm sorry so you want the GAP insurance to pay off the finance, and then supply you with a brand new car free of finance. Don't think do mate. Replacement vehicle GAP would be for people who own a car free of finance.

regency_man

rich13348 wrote: »

I'm sorry so you want the GAP insurance to pay off the finance, and then supply you with a brand new car free of finance. Don't think do mate. Replacement vehicle GAP would be for people who own a car free of finance.

LOL, no not at all. And you're wrong, Replacement Vehicle GAP is marketed to and sold for people with financed vehicles, not just vehicles owned out right.

When you buy GAP you have three options, cheapest to most expensive:
1) Finance Shortfall (difference between pay out and finance settlement)
2) Invoice Value (difference between pay out and what you paid for the original vehicle)
3) Replacement Vehicle (difference between pay out and the cost of a brand new vehicle of the same model and spec)

The reason you pay more for option 3 is because (as you said) it will cover the finance and potentially a lot more. What I'm confused about is why the pay out of the GAP policy goes to the dealership and not into your bank so you can pay off the rest of the finance (if there is a shortfall).

daveyjp

You don't own a PCP car until you pay off all the finance, thats why you don't get the money.

rich13348

regency_man wrote: »

The reason you pay more for option 3 is because (as you said) it will cover the finance and potentially a lot more. What I'm confused about is why the pay out of the GAP policy goes to the dealership and not into your bank so you can pay off the rest of the finance (if there is a shortfall).

I think the bit you have been quoted has been badly written. The normal insurance will be paid to the finance company as they own the vehicle, although that's not what we are getting at. The GAP will pay out to the finance company directly for that and not to you, or the dealership of their choice.