Finance and Contract Hire Gap Insurance has been available for many years in the UK. It is considered the basic type of Gap cover, and is specifically designed to protect between the market value settlement from your motor insurer and the outstanding finance settlement on a hire purchase or lease agreement. In other words, of you owe more on the finance than the vehicle is worth, Finance and Contract Hire Gap Insurance can cover the difference.
However, one slight complication is making sure you have the correct ‘claim limit’ on the policy, as this is the most that your Gap cover will pay to ‘bridge the gap’. The issue is how would you know what the difference may be at any given time? Of course this is difficult, but many consumers can fall into a trap of over estimating the limit they will need due to one piece of information found on many hire purchase agreements.
Gap Insurance and Finance agreements
As part of a hire purchase style finance agreement, you will see a figure detailed as ‘Total amount payable‘ under the finance agreement. This is legally required to indicate what the total cost of buying the vehicle will be for you, but many consumers also think this is a figure that the finance company will require for a settlement at any point.
This is highly unlikely to be the case.
Lets illustrate this by considering the following example:
A car is bought with an invoice price of £15,000, the customer pays a £3,000 deposit and has a £12,000 balance on the finance agreement. The finance is payable over 60 monthly instalments of £240 at a flat rate of interest of 4% per annum.
In this case the ‘total amount payable’ for the vehicle will be £17,400, and this will be shown as such on the finance agreement.
So if the vehicle was written off in the third year, and then had a market value of £8,000 then what exactly would your Finance and Contract Hire Gap Insurance have to cover? Well certainly not £17,400, and let us explain why.
The Total Amount Payable is made up from several different elements. Firstly the total of the monthly instalments you have paid over the full 60 months on the finance agreements, including the interest. If you had put a part exchange vehicle into the deal, then this would also be added, along with any cash deposit. So if you add all these elements together then you will arrive at £17,400.
So why will the finance company not ask for £17,400? Well part of that is a £3,000 deposit you have already paid, and the loan of £12,000 will have had 3 years of instalments made on it. Granted the £240 each month will have an interest element but this means you will owe far less than the £12,000 you originally borrowed.
So how does this effect the Finance Gap Insurance policy you may buy? Well first of all, the claim limit you choose will only have to cover the potential shortfall on the finance settlement from the vehicle value. Remember as the vehicle value drops due to depreciation, the finance settlement also decreases as you make those monthly payments.
The deposit you have put in will also lessen the chance that any substantial shortfall will ever exist. This means that if you do opt for a finance Gap protection then you may never need a large claim limit, and perhaps the £5,000 standard minimum will suffice.
So when you have a mild heart attack when you see ‘total amount payable’ on a finance agreement, take a step back and think again. You may not be as exposed as you think!