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What is GAP insurance, and do I need it for my car?

GAP insurance can help prevent you from being out of pocket if your car is written-off or stolen

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If you’re buying a car from a dealership, the salesperson will probably offer you GAP insurance. But what is it, and do you really need it?

What is Guaranteed Asset Protection (GAP insurance)?

A GAP (Guaranteed Asset Protection) insurance policy can protect your car because it covers the difference between how much you paid for it and the amount that an insurance company would pay out if it was written off or stolen.

The reason GAP insurance exists is because of vehicle depreciation.

It's true what they say – a car starts to lose money as soon as you drive it off a forecourt.

It can almost instantly lose a third of its value, 40% over the first year and, depending on the make and model, up to 60% over the first three years.

If you’re unlucky enough to have your car written off or stolen, your regular insurer will pay out what it's worth at the time that happens.

This is likely, however, to be less than what you paid when you bought it. If your car is brand-new, there will be a 'gap' between what your insurer pays out and how much you originally paid.

This gap is what is covered by GAP insurance.

Is GAP insurance right for me?

If you’ve borrowed money to buy your car or have car finance such as a Personal Contract Purchase (PCP) deal and then it’s stolen or written off, what the insurance company pays you may be less than the loan you took out.

GAP insurance will make sure that you get back everything that you borrowed so you’re not out of pocket.

The other reason for taking out GAP insurance is if you want a new car to replace the one that you’ve lost to theft or damage.

What a regular insurance policy will pay out will be the value of your car when it had to be replaced, which is what you paid for it, minus the depreciation since you bought it.

If you want a car that’s comparable to what you originally bought, you might want to consider GAP insurance.

Car finance

Where do I buy GAP insurance?

You can buy it at a dealer (it’s a useful source of extra profit for them) – although they’re no longer allowed to sell it to you at the same time as they sell you the car: there has to be a 48-hour ‘cooling-off’ period between told the cost and actually being able to buy it.

However, as with most things these days, it’s cheaper online, where specialist GAP insurers often charge a fraction of what dealerships quote.

Are all GAP insurance policies the same?

No, they’re not. 

There are several different types of GAP insurance, depending on what you need.

‘Contract hire’ insurance, for example, is best suited to buyers who have a lease deal that doesn't include the option to buy at the end.

Your regular insurance will cover the current market value of the car, with the GAP insurance covering any remaining payments.

Then there are ‘back to invoice’ insurance policies, which pay the difference between what your insurance company pays out and either the original amount you paid or the amount you owe a finance company.

Another popular form of GAP insurance is ‘vehicle replacement insurance’, which pays out the difference between what your insurer will pay you and how much a comparable brand-new car would cost, or, if your car was used, how much it was when you originally bought it.

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