A Beginner’s Guide to Financed Car Insurance

Introduction

When it comes to purchasing a car, the good thing about getting it on finance is that there
are a lot of options to choose from. Equally, the bad thing about finance is that there are a
lot of options and it’s difficult to know where to begin or how to make sure you’re
financially protected.

In this blog, we’ll be going on a deep dive into car finance insurance, which is one of the
aspects of buying a car on finance that can offer you peace of mind. We’ll look at the
benefits of car finance insurance, why it’s important, and how it works in the UK.

What is Car Finance Insurance?

Car finance insurance, often known as GAP (Guaranteed Asset Protection) insurance, is
a policy designed to cover the difference between the amount you owe on your car
finance agreement and the cars market value in the event of your car being written off or
stolen and not recovered.

Why is Car Finance Insurance Important?

New cars tend to lose their value fast – as much as 60% within the first three years. If you were to experience a total loss due to theft or an accident, the settlement from your comprehensive insurance might only pay out your car’s current market value and not cover the remaining balance of your finance agreement. Without GAP insurance, you would be liable to pay the difference.

What are the types of Car Finance Insurance?

You can get various types of car finance insurance – each is designed to work better for you depending on your needs.

1. Return to Invoice (RTI) Insurance: This type covers the difference between the insurer’s pay-out and the original invoice price you paid for the car. It’s particularly useful for new cars that lose value quickly.
2. Vehicle Replacement Insurance (VRI): VRI covers the cost of replacing your car with a new one of the same make, model, and specifications if it’s written off. This is handy in a market where car prices are rising.
3. Finance GAP Insurance: This policy specifically covers the gap between the insurance pay-out and the remaining finance owed on the car. It’s ideal if you’ve got a significant amount of outstanding finance.

How Does Car Finance Insurance Work?

Here’s an example to help explain how car finance insurance works in practice:

You buy a car for £20,000 using a finance agreement. After two years, the car is written off, and your insurance company values it at £12,000. If you still owe £15,000 on your finance agreement, you’d be left with a £3,000 shortfall. Car finance insurance covers this amount, so you’re not left out of pocket.

What Are The Benefits of Car Finance Insurance?

1. Financial Protection: The biggest benefit is the financial protection. You won’t be left having to dip into your rainy day savings or take out a loan to cover unexpected payments.
2. Peace of Mind: Knowing that you’re protected if something were to happen to your car gives you one less thing to worry about.
3. Maintain Credit Rating: Car finance insurance also helps you keep up your credit rating, as you won’t have to miss a payment or default on your finance agreement.

Things to Consider When Choosing Car Finance Insurance

Here are a few things to look out for when you’re choosing your car finance insurance:

1. Policy exclusions: Some policies might not cover certain situations or have strict conditions on claims, so watch out for the fine print.
2. Cost: The cost of car finance insurance can change depending on the car’s value, the length of the finance agreement, and the level of coverage. Think about whether the premium is affordable and is good value for money.
3. Provider reputation: Choose a reputable insurance provider with a good track record in customer service and claim handling. Checking out customer reviews and ratings can give you a good idea of how reliable they are.
4. Overlap with existing cover: Make sure to check if your current car insurance or finance agreement already includes some form of GAP cover. After all, no one wants to pay for the same thing twice.

How to Purchase Car Finance Insurance

You can purchase car finance insurance in a few different ways, including:

1. From a dealership: Many car dealerships offer GAP insurance when you buy used cars. It’s the most convenient but doesn’t always provide the best value.
2. Through an insurance broker: Brokers can compare multiple policies to find the one that best suits your needs and budget.
3. From an online provider: Many online insurance companies offer GAP insurance policies. They often have the most competitive prices and you can easily compare different policies.

Conclusion

In all, car finance insurance is an important consideration for anyone entering into a finance agreement to purchase a car. While it may seem like just another thing you have to pay for, the peace of mind and financial security it offers can be invaluable. This beginner’s guide will help give you a better idea of how car finance insurance works, but we always recommend doing your research so you can pick a policy that meets your needs.