Gap Cover Insurance Gap Insurance for Cars

Gap cover insurance for cars Australia wide is an insurance product that covers the insured against the gap created due to the car depreciating faster than the balance of the car loan and pays out if the car is declared a total loss by the comprehensive car insurer. A total loss means that your car is stolen and not recovered or is damaged beyond economical repair.

Gap insurance stands for guaranteed auto protection insurance, and is sometimes referred to as shortfall insurance.

Gap insurance can only be taken out by people that have a car loan and therefore also have comprehensive car insurance. Many insurance companies Australia wide that insure cars have gap cover insurance as one of the insurance products they sell. Car loan lenders like gap cover insurance as part of the loan because it gives them extra security; especially on used cars. Shop around to get the best gap cover insurance quote.

How Gap Cover Insurance works

If there is an accident with your car, and the insurance company that has the comprehensive insurance on it declares the car as a total loss, then the loan will be paid out regardless of what is owing. This is useful in the early stages of a car loan where you borrowed the full amount; or close to it. The market value of the car will decrease faster than the loan balance due to depreciation leaving you with a gap.

Let’s look at an example of how gap cover works.

Looking at the chart above, you take out a car loan for $25,000 and the car was purchased for $25,000, so you borrowed one hundred percent. There will also be extra fees and charges on the loan so you will already have the loan amount higher than the cars value of $25,000.
Each month you make a payment of say $400, you are also paying interest, so the balance after say six months may still be around $18,500 (if the loan was at 12% over 5 years) but cars depreciate quickly in value often losing 20 to 30 percent, so your cars value may only be $20,000. This means that after the insurance company pays out the car loan for $20,000 you still owe the lender at least $5,000 in this example; i.e. there is a gap! This is where the gap cover insurance comes in. The gap cover insurance pays the car loan out, in full and there is also an added bonus of an amount of money paid to you for additional out of pocket expenses you may incur such as stamp duty on the next car you purchase.

Remember too that you purchased the car retail, which is the highest value. The insurance company will pay out the wholesale market value, which can be a few thousand dollars less, so in the above example you could actually owe the lender $7,000. For larger amounts borrowed this gap gets bigger, and when gap cover insurance becomes even more important. This is also true for new cars which can depreciate 20 to 30 percent as soon as you drive them off the car yard.

Benefits of Gap Cover Insurance

There are many benefits to having a gap cover insurance policy including:

• Covers your financial exposure to a gap between what the market value insurance payout is and what you still owe on the loan if your car is written off or stolen
• Protects your credit rating by eliminating the possibility of having to pay two loans; the balance of the old one and the new loan for the new car
• The premium is a once off amount that can be financed and covers you for the complete term of the loan
• Car loan lenders like to add gap cover insurance to the car loan because they know if the car is a write off they will be paid out in full
• Additional lump sum payment; usually in the amount of between $4,000 and $6,000 to cover any other expenses; or help fund a better car
• Gap cover insurance covers new and used cars Australia wide for a total loss, i.e. written off in an accident or stolen

Who qualifies for Gap Cover Insurance?

Anyone that has a car loan on their car and has comprehensive car insurance cover; which is required by law in any case, qualifies to have gap cover insurance.

Cost of Gap Cover Insurance

As with all insurance product premiums they vary with the different insurance companies so before taking out gap cover insurance it would be wise to compare car insurance quotes for gap cover with several insurers. You will also notice by reading the product disclosure statement from each insurance company that there will be different ‘extra amounts’ the insurer will pay out if your car is written off or stolen. Gap cover premiums are generally in the range of $2,000 depending on the level of cover you take out, which equates to around a dollar a day on a 5 year loan term, making it very affordable and gives you extra piece of mind.