Worried About Depreciation? Get Gap Insurance

In the world of automobiles, depreciation reigns supreme. The moment you drive your new car off the lot, its value begins to plummet. This rapid decline in worth can leave you in a precarious financial position, especially if your vehicle is stolen or involved in a total loss accident.

Gap insurance, a valuable add-on to your auto insurance policy, steps in to bridge the gap between the depreciated value of your car and the outstanding loan balance, shielding you from the burden of hefty out-of-pocket expenses.

What Is Depreciation?

Depreciation typically refers to the decrease in value of a car over time. It’s a crucial factor to consider when purchasing or owning a vehicle, as it impacts the car’s resale value. Here’s a breakdown of how depreciation works:

1. Initial Depreciation: New cars depreciate the most rapidly. In the UK, it’s common for a new car to lose a significant percentage of its value in the first year. This loss can be as high as 15% to 35%, depending on the make and model.
2. Ongoing Depreciation: After the initial period, the rate of depreciation tends to slow down but continues over the lifespan of the vehicle. The value decreases due to factors like wear and tear, mileage, and advances in newer models.
3. Factors Affecting Depreciation: Various factors can influence a car’s depreciation rate, including the brand, model, market demand, overall condition, mileage, service history, and how well the car has been maintained.
4. Impact on Resale Value: When you decide to sell or trade in your vehicle, depreciation is a key factor in determining its current worth. A car that has depreciated less will fetch a higher price on the used car market.
5. Calculating Depreciation: To estimate depreciation, you can compare the car’s original purchase price with its current market value. There are also online calculators and tools specific to the UK market that can help in estimating a car’s depreciation.

Understanding depreciation is important as it not only affects the total cost of car ownership but also plays a crucial role in making informed decisions about buying, selling, or trading in vehicles.

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Related Reading: The Least Depreciating Cars For New Drivers In The UK: Get The Best Value For Money

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What Happens If I Owe More on My Car Than It’s Worth?

Owing more on your car than it’s worth, a situation often referred to as being “upside down” or having “negative equity” on your car loan, is not uncommon, especially in the early years of a car finance agreement.

This situation can occur due to rapid depreciation of the car’s value, particularly in the first few years. Here’s what happens and what you can do if you find yourself in this situation.

1. Impact on Selling or Trading In: If you decide to sell or trade in your car while you owe more than it’s worth, you will need to cover the difference between the car’s sale price and the remaining balance on your loan. This means you would have to pay additional money to clear the loan.
2. Issues in Case of Total Loss: If your car is written off or stolen, your car insurance will only cover the current market value of the car, not the total amount you owe on your finance agreement. This could leave you with a significant shortfall to pay on a car you no longer have.
3. Options to Manage Negative Equity:
   • Continue Paying Off the Loan: The simplest option is to keep the car and continue making payments until the loan balance drops below the car’s value.
   • Refinance the Loan: If possible, you could try to refinance the loan to get a lower interest rate or extend the loan term to reduce monthly payments, though this might increase the total interest paid over time.
   • Roll Over the Negative Equity: Some finance companies allow you to roll over the negative equity into a new car finance agreement, but this can lead to a cycle of debt and is generally not advised as it increases the total loan amount on the new car.
4. GAP Insurance: If you had taken out GAP insurance, in the event of a total loss, this insurance would cover the difference between what your car insurance pays out and the remaining balance on your finance agreement.
5. Financial Planning and Advice: It’s important to carefully manage your finances in this situation. Seeking financial advice can help you make informed decisions on how to best handle the negative equity.
6. Preventing Negative Equity: For future reference, making a larger down payment, choosing a shorter finance term, or selecting a car that holds its value better can help prevent negative equity.

Being in negative equity on a car loan requires careful financial management and planning. It’s important to understand all your options and the potential consequences of each before making a decision.

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Related Reading: Negative Equity On Car Finance Explained: Impacts & Solutions

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How Does Gap Insurance Protect Me From Depreciation?

GAP (Guaranteed Asset Protection) insurance offers financial protection against the depreciation of your car, particularly in the event of a total loss. Here’s how GAP insurance works to protect you from depreciation:

1. Covering the ‘Gap’: The primary purpose of GAP insurance is to cover the difference (or ‘gap’) between the amount your car insurance pays out and the original purchase price of your car, or the outstanding finance amount, in case of a total loss. This is crucial because standard car insurance policies typically pay the current market value of your car at the time of the claim, not what you originally paid for it.
2. Scenario of Total Loss: If your car is stolen and not recovered, or is written off in an accident, your standard car insurance will pay out the current market value of the car. Due to depreciation, this amount can be significantly less than what you paid for the car, or what you still owe on a finance agreement.
3. Types of GAP Insurance: There are different types of GAP insurance, like Return to Invoice GAP, Vehicle Replacement GAP, and Finance GAP. Each type offers different levels of protection, such as covering the difference between the insurance pay out and the original invoice price, or the amount needed to purchase a new car of the same model and specification.
4. Financial Protection: GAP insurance is particularly beneficial if you have a car on finance or lease. If your vehicle is written off and your insurance pay out doesn’t cover the outstanding finance amount, GAP insurance can cover this shortfall, ensuring you’re not left paying for a car you no longer have.
5. Considerations for Drivers: When considering GAP insurance, it’s important to assess factors like the depreciation rate of your car, your financial situation, and the terms of your car finance or lease agreement. It’s also essential to understand the terms and conditions of the GAP policy to ensure it meets your needs.

In summary, GAP insurance provides an added layer of financial protection against the rapid depreciation of cars, especially in scenarios of total loss where the standard car insurance pay out may not reflect the car’s original value or the outstanding amount on a finance agreement.

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Related Reading: Gap Insurance: A Must-Have for Leased Cars?

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Need Gap Insurance?

There are a few different types of policy you can choose from when taking out your Gap Insurance cover with Click4Gap. These depend largely on how you intend to fund the purchase of your vehicle. So what car Gap Insurance is right for you?

Combined Return to Invoice Gap Insurance

If you paid cash for your vehicle, or paid a sizeable deposit, or if you financed it, Combined RTI Gap cover will pay out the shortfall between the cost of your vehicle and the market value at the point of claim, which is the amount your motor insurer will cover. This is cover that will protect you no matter if you use your vehicle for private use or for business.

Lease/Contract Hire Gap Insurance

If you leased your vehicle or it is under a contract hire agreement, Lease/Contract Hire Gap Insurance will cover you for the shortfall on your lease agreement, after your motor insurer settlement. If, for any reason, you change your vehicle within the first 90 days from the start date, we will also arrange to transfer your cover to your new vehicle without hassle or charge.

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Related Reading: The Consequences of NOT Having Click4Gap Gap Insurance