Personal Contract Purchase, or PCP for short, is possibly the most popular form of car finance offered in motor dealers today. The basis of the finance plan is that the car buyer pays a monthly instalment over a period of months (normally 36 or 48) and the has the option to buy the vehicle for the Guaranteed Future Value, or GFV. The other options would be to simply hand the vehicle back, with no further obligation or payments, or to trade in the vehicle for a new car.
So if you buy a vehicle on a PCP finance agreement, you may want to protect yourself with Gap Insurance. Most motor dealers will offer a form of Return to Invoice Gap, whereby you are protected for the difference between the motor insurers settlement and the original invoice price you paid. This means you should have enough to pay off your finance, and have a nice amount of deposit left over to be able to replace the vehicle on another finance agreement.
Gap Insurance claim limit on a PCP finance agreement
However, there is one aspect of cover that comes up time and time again, what ‘claim limit’ should you opt for?
The claim limit on a Gap Insurance policy is the maximum you will be able to claim on the Gap policy itself, in the event of a claim. So in terms of Return to Invoice Gap then this figure needs to be enough to cover the potential depreciation of the vehicle over the policy period.
In calculating the correct level for this, a PCP agreement does give us some assistance. The difference between the original invoice price paid, and the GFV required at the end, gives a worse case scenario of the expected depreciation of the vehicle in the eyes of the finance company. So if you simply use the difference between the two then this may help in identifying a claim limit.
As an example, if the invoice price was £20,000 and the GFV is £8,000 in three years time, then this is a difference of £12,000. It may be sensible to choose a claim limit that can accommodate this figure to ensure you are adequately covered.