GAP insurance for used car on PCP?

Luke88

Hi all,

Hoping to get some clarification on GAP insurance before purchasing, if it's worth it...

We've recently bought a 2 year old car with PCP finance. The price of the car was ~£15000 and we paid a £1500 deposit. Repayments are ~£245 per month, for 48 months, total £11760.

So without gap insurance, let's say the car gets stolen or written off tomorrow (hopefully not), our car insurance pays out £12500 (which was a figure for the car's value when getting car insurance quotes). In this scenario, am I right in thinking that it would cover the 48 monthly payments totalling £11760, and £740 of our £1500 deposit, with the rest (£760) as a shortfall we'd take a hit on?

Or, with PCP, do we have to also factor in the optional final "balloon" payment in to the above example, which is about £5000? In which case there would be a shortfall of £5000+£760 of our deposit. I don't think this would be the case but wanted to double check!

I understand that there are different types of gap insurance. If it would just cover the remaining PCP finance then I guess we'd lose our deposit, so "return to invoice" to give us £15000 back in total would seem preferable if the premium isn't significantly more.

If car insurance would currently pay out more than the £11760 remaining, then presumably the biggest benefits would be further down the line if/when the car's value depreciates to less than outstanding PCP amount?

Cheers,
Luke

Sandtree

If you just paid £15,000 for the car why are you saying its worth £12,500? 

In the event of a total loss the finance company will provide an early settlement figure which includes the outstanding finance (inc the balloon) and a certain amount of interest effectively as a penalty for early settlement. The car insurer will calculate a market value for the car at the date of loss based on pre-accident condition then deduct the excess and assuming the amount is less than the early settlement amount the full amount gets paid to the finance company. 

If you have traditional/cash GAP insurance then it will respond by paying off any outstanding finance whereas if you didnt then you have to pay the extra. 

How likely you are going to be in negative equity will depend heavily on how good a deal you did on the car price and the APR of the finance. Plus, a matter more outside of your control, what happens to the market value of your car. 

Penelopa.Pitstop

If you buy return to invoice GAP, it will pay the difference between insurer payout and initial invoice. This should be enough to cover outstanding finance and you will get some cash.

If you buy vehicle replacement GAP, it should allow you to get enough to buy same car you had, difference between this product and return to invoice, is that car prices might have gone up and it costs more to replace the car.

Or you can buy simple finance GAP which will pay off your finance, in case there's a shortall after insurance payment. However, you won't get back anything you paid upfront for the car.

Sandtree

RV and RTI GAP normally includes Finance gap too so if for some reason the finance exceeds the original invoice price it will pay that off rather than the invoice price.... obviously fairly rare to happen given they dont cover missed payments etc but in theory possible if a nil deposit finance deal etc

Luke88

Sandtree said:

If you just paid £15,000 for the car why are you saying its worth £12,500? 

In the event of a total loss the finance company will provide an early settlement figure which includes the outstanding finance (inc the balloon) and a certain amount of interest effectively as a penalty for early settlement. The car insurer will calculate a market value for the car at the date of loss based on pre-accident condition then deduct the excess and assuming the amount is less than the early settlement amount the full amount gets paid to the finance company. 

If you have traditional/cash GAP insurance then it will respond by paying off any outstanding finance whereas if you didnt then you have to pay the extra. 

How likely you are going to be in negative equity will depend heavily on how good a deal you did on the car price and the APR of the finance. Plus, a matter more outside of your control, what happens to the market value of your car. 

Thanks for the info, good to know the finance balance would actually include the balloon payment. When I googled I couldn't seem to find a clear answer on that. I think we will purchase gap insurance to cover all of the finance should the worst happen. If ins did pay out the £15k value of the car then we'd be looking at a shortfall of about £3k.

Just to clarify, as above the ins comparison site generated a value of roughly £12.5k. The price of the car itself was reasonable. Similar models with variable mileage were 14-16k. It was considered a "good" price according to autotrader. It's somewhat irrelevant in terms of insurance coverage if they will only payout what THEY consider it's worth at the time. Hopefully it never happens anyway 🙂

@Penelopa.Pitstop
Just to clarify, when you say: "This should be enough to cover outstanding finance and you will get some cash." Are you suggesting the outstanding finance wouldn't include the balloon payment as Sandree suggested? If we did only receive a payout of £12.5k, RTI with GAP would give us a further 2.5k. But we would owe £11750+5000 balloon. So 16750 - 15000 = 1750 shortfall. If we were a year or so down the line and had paid over 1750 with monthly payments then in that scenario we would get some cash left over with RTI. Is that right?

TIA

Sandtree

Luke88 said:
It's somewhat irrelevant in terms of insurance coverage if they will only payout what THEY consider it's worth at the time. Hopefully it never happens anyway 🙂

Its worse than irrelevant, its a double edge sword... they will certainly only payout what they believe market value is however you are required to answer the questions honestly and accurately so if you buy the car for £15k and then declare its value as £12k you either are saying you know you paid too much for it or you arent answering the question honestly.

Penelopa.Pitstop

Luke88 said:
@Penelopa.Pitstop
Just to clarify, when you say: "This should be enough to cover outstanding finance and you will get some cash." Are you suggesting the outstanding finance wouldn't include the balloon payment as Sandree suggested? If we did only receive a payout of £12.5k, RTI with GAP would give us a further 2.5k. But we would owe £11750+5000 balloon. So 16750 - 15000 = 1750 shortfall. If we were a year or so down the line and had paid over 1750 with monthly payments then in that scenario we would get some cash left over with RTI. Is that right?

TIA

It doesn't work the way you describe it. Finance company will issue you settlement quote which will include interest rebate, because you're ending contract early. So you won't be paying all due instalments + balloon that you calculated. It will be lower amount. You borrowed £13.5K from finance company, so settlement will be similar or lower if you had to pay it tomorrow. Over time, you will pay off a bit of capital, so your settlement amount will be going down each month. So, let say that your car is written off in a year, by then, your settlement will probably be around £11-12K.