Featured within the Which? Report on Gap Insurance.
Protected by the Financial Services Compensation Scheme.
What happens when your vehicle is written off and you have outstanding finance?
This will depend on what type of finance you have 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 upto 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 have purchased the vehicle on a personal loan, whilst you wouldn't have to clear the finance within a set time frame of say 30 days, you would be left paying off your monthly loan amount whilst having no vehicle. Very much similar, 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 stolen, flood or accident etc) your own motor insurer will pay the market value of the vehicle at that time. Due to rates of depreciation, this is a fraction of the price you've paid and in a lot of cases, the value will be a lot less than the amount outstanding on the finance. For example, if your own motor insurance company pay a settlement figure of £10,000 and the amount outstanding on finance is £15,000. The £5,000 shortfall is the figure you would have to pay off, again 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%)
This means that if your Skoda was declared a total loss in two and a half years time, it wouldn't be unreasonable to think that your own motor insurance company would offer you around £5,500.
If 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 as well as the £345 shortfall to clear the balloon payment. That is just 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. Not a nice 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 being declared a total loss, we can give you the security you need financially to ensure that the situation doesn't get any worse. If you purchase a Combined Return to Invoice & Vehicle Replacement Gap Insurance policy, 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 then 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 on 0800 195 4926/0151 647 7556 and any member of the team will be more than happy to help.
Your policy is fully FCA regulated and backed by the Financial Services Compensation Scheme.
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