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PCP Finance and Total Loss Gap, how does it work?



If you have ever tried to buy a car from a franchised motor dealer in the last 15 years then you, no doubt, will have discussed the option of doing so by a financial arrangement called a Personal Contract Purchase, or PCP.


Personal Contract Purchase is a hire purchase based finance agreement with a few characteristics that make it a little different.



What you will see with a PCP



Normally you will be asked to pay a deposit. This can be either a cash deposit, equity from a part exchange vehicle or perhaps an allowance from the manufacturer or finance company (often termed an FDA, or Finance Deposit Allowance).


You will have a fixed, monthly instalment for a fixed period of time. These are typically 2,3 or 4 years. 


At the end of the agreement you have three options:


  • You can buy the vehicle for the fixed sum stated on your agreement, known as a Guaranteed Future Value, or GFV.
  • You can part exchange the vehicle, using any equity (any value of the vehicle above the GFV) as a deposit for a new vehicle.
  • You can hand the vehicle back to the finance company with no further instalments to pay.


This type of finance agreement allows for lower monthly payments, flexibility for both you and the dealer to conclude a further deal in the future and a way of maintaining a relatively new vehicle that may be subject to manufacturers warranty for the time of your ownership.



So if PCP is so good is there a need for Gap Insurance too?



Well, the question of Gap Insurance is really no different with a PCP than it would be with any other hire purchase agreement. The only time the 'guarantee' of the PCP comes into effect is at the end of the agreement when you can hand the car back with nothing further to pay.


If something happens to the vehicle in the meantime, and it is deemed a 'write off' by the motor insurer, then you may have finance owing and you still have to replace the vehicle.



How does Total Loss Gap work with PCP?



To be clear the correct type of Gap Insurance to consider with PCP is the Combined Invoice and Replacement Gap from Total Loss Gap, not Lease Gap. Lease Gap is perfect for when you have NO OPTION TO OWN the vehicle. With PCP you do.



If the vehicle is secured on a PCP agreement, is subject to theft, fire, accident etc and is 'written off' then Total Loss Gap Invoice and Replacement Gap would work as follows.



We need to look at four figures:


  • The motor insurers 'market value' settlement offer
  • The outstanding finance settlement at point of claim
  • The original invoice price you paid for the vehicle
  • The cost of the equivalent replacement at the time of claim



So let's use these figures, as an example.



You buy a brand new vehicle for £20,000.



Two years later it is stolen and you get £12,000 as an offer for the vehicle, from your motor insurers.



You still owe £14,000 on the PCP finance agreement.



The equivalent new vehicle, to replace, is now £22,000



Your Combined Invoice and Replacement Gap from Total Loss Gap can cover the difference between your motor insurers settlement (£12,000 in this case) and the higher of:


  • the outstanding finance settlement (£14,000)
  • the original invoice price paid (£20,000)
  • the replacement cost of the equivalent vehicle* (£22,000)



In this case the highest of the three amounts is the replacement cost at £22,000. So here we would see the Gap settlement paying out £10,000 to cover the difference from the motor insurers settlement to the replacement cost.



This means you would have £22,000 between the two insurance policies. However, you must remember that you have to pay the settlement figure on the PCP (in this case £14,000).



Overall this would leave you with £8,000 to use as a deposit for a new vehicle of your choice.



If you compare this settlement with what you would get, using the same situation, from a Finance Gap policy (£0) or a Combined Return to Invoice policy (usually the one offered by the motor dealer - £6,000) then you can see Combined Invoice and Replacement Gap from can be the perfect choice for PCP finance.