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Outstanding Finance & Gap Insurance


What happens when your vehicle is written off, and you have outstanding finance?


This will depend on your type of finance and if the finance is attached to the vehicle. If you have purchased a vehicle using a personal loan from the bank, for example, as the finance isn't attached to the vehicle, your Gap Insurance policy would perform slightly differently. Rather than having to clear the outstanding finance, any settlement paid is a cash settlement coming straight back to you. It is then your choice whether or not you clear the balance outstanding on the loan.


If you have finance that is directly attached to the vehicle, such as a Hire Purchase agreement or a Personal Contract Purchase, any settlement paid out would always have to clear the amount outstanding on finance and then the difference up to either the purchase price or replacement cost is yours to do as you wish.


If you have a Contract Hire/Lease Hire Gap Insurance and you have no option to own the vehicle at the end, any Gap Insurance settlement paid would always clear what you owe, and you walk away with no liability.


What happens if you don't have any Gap Insurance?


If you purchased the vehicle on a personal loan, whilst you wouldn't have to clear the finance within a set time frame of 30 days, you would be left paying off your monthly loan amount whilst having no vehicle. The same applies if you have taken the vehicle on a Hire Purchase or PCP agreement; the only difference is that the finance is directly linked to the vehicle, and you may have a set amount of time to clear the balance on the finance, again, without having a vehicle. 


In the event of a total loss (i.e., theft, flood, accident, etc.), your motor insurer will pay the vehicle's market value at that time. Due to depreciation rates, this could be a fraction of the price you've paid, and in many cases, the value will be much less than the amount outstanding on the finance. For example, if your motor insurance company pays a settlement figure of £10,000 and the amount outstanding on finance is £15,000. Again, the £5,000 shortfall is the figure you would have to pay off, with no vehicle to show for it.  


Examples of outstanding finance & depreciation rates

Skoda Rapid 1.4 TDI CR SEL.

Depreciation rates according to What Car Magazine | 22nd September 2017

Purchase Price: £18,975

Depreciation after Year 1: £11,900 (62.7%)

Depreciation after Year 2: £12,950 (68.2%)

Depreciation after Year 3: £14,050 (74.0%)


If your Skoda were declared a total loss in two and a half years, it wouldn't be unreasonable to think that your motor insurance company would offer you around £5,500.


Suppose you had purchased your vehicle on a PCP. According to Skoda UK and the PCP illustration on the Rapid model, after 42 months, the optional final payment for your vehicle is approximately £5,845. 


Therefore, if the vehicle was declared a total loss after just two and a half years and you received £5,500 from your motor insurance company, you would owe 12 months' worth of finance and the £345 shortfall to clear the balloon payment. That is to clear the outstanding finance; the equity (i.e. the money you have paid towards the vehicle) has now disappeared due to the level of depreciation. It's not a pleasant situation to be in.


This is where Gap Insurance can offer you that financial peace of mind should the worst happen. Whilst we can't stop the vehicle from being declared a total loss, we can give you the financial security to ensure the situation doesn't worsen. 


Suppose you purchase a Combined Return to Invoice and vehicle Replacement Gap Insurance policy. 


In that case, you ensure that at least the invoice price you have paid, for example, the Skoda Rapid at £18,975, is the settlement figure we get you back to. Within that settlement of £18,975, we clear any outstanding finance, and the money left over, which is made up of the equity you have paid towards the vehicle and any deposit you have put down, comes back to you. Therefore, you walk away with no outstanding finance, and the equity is back with you as a cash settlement.

If you have any further questions on outstanding finance and how Gap Insurance works, why not call any member of our award-winning customer service team at 0800 195 4926/0151 647 7556? Any member of the team will be more than happy to help.