GAP Insurance stands for Guaranteed Asset Protection and this can be added to your finance package, or paid separately via cash or credit card.
GAP Insurance, or sometimes known as shortfall insurance will cover the difference between your finance payout and your Comprehensive insurance payout in the event of a total loss, such as a theft or an accident that resulted in a write-off.
When you purchase a vehicle, you may also pay certain costs, such as Registration, CTP, Stamp Duty and Dealer Delivery Charges. These are real costs, but do not add anything to the market value of your vehicle. Also, as most know, the minute you drive away in your new car, it starts losing value straight away.
Unless you have substantial equity going into your finance, such as a significant deposit or a trade in, you most likely will be financing more than the market value of the vehicle from day one. You also need to consider that your loan would also have set up costs, which in most cases are financed.
This can pose two problems; in the early stages of your loan, the balance is at its highest, meaning that with your set repayment, the interest component is also at its highest. It seems to take forever for your loan balance to reduce. The second problem is that the market value of your vehicle is declining with depreciation, much quicker than your loan balance is, leaving a shortfall between your actual loan balance and the value of your vehicle.
As a standard condition of most secured car loans, you are required to have full Comprehensive Insurance on your vehicle at all times whilst the loan is active. In the event of a total loss, your insurer is required to forward the insurance payout directly to your lender. This is due to the fact that the lender is using the vehicle as security over the loan. Once the vehicle is declared a total loss, the lender has no security and their expectation is that the loan needs to be finalised in full.
Quite often the insurance payout will not meet the total finance payout to finalise the loan and taking into consideration that the lender will still most likely charge early payout penalties inclusive in their payout figure, this can increase that shortfall amount. The lender will not allow you to carry on your normal repayments to finalise the shortfall and they would expect it to be paid as a lump sum, as they have no security on the loan due to your vehicle becoming a total loss.
If you were unfortunate enough to be in this situation, what could happen if you did not have this total amount? Your lender will request you to pay it in full in one lump sum and if you did not pay it in full, they could place your loan in default. Now you may find yourself in a position that you have a poor car loan history, with a car that is a total loss, a large shortfall debt and troubles finding someone to finance you to buy a new car, which you obviously need, as your lender has placed your loan in default or even worse, when other lenders ring to do a credit reference, your current lender gives a poor reference due to an outstanding debt, resulting in a decline with your new application.
GAP Insurance will cover your shortfall amount up to the limit selected in your policy. This will ensure your lender’s expectations are met and in most cases your loan is paid in full, which relieves you of this additional financial burden at a time that is already stressful.
Our insurer will also pay you an additional ‘extras benefit’ as a cash settlement, which will give you the ability to use this to assist in getting into your new vehicle and can help with costs such as your new Comprehensive Insurance policy, any excess payable, on road costs, just as a few examples. Even if you don’t have any shortfall you can still receive some of the ‘extras benefit’. The amount you would receive will be dependent on the level of cover selected in your policy.
Not only can this product benefit you financially in a situation that may already be stressful, it can also protect your credit worthiness in the event that you did not have the large shortfall amount required by your lender at the time of insurance payout.