Gap Insurance and PCP Agreements
Personal Contract Purchase and Gap Insurance may not at first seem a perfect match. After all, you are told that PCP protects you in so many ways because the depreciation on the vehicle is the finance company's responsibility and not yours. This is true, of course, but only at the end of the PCP agreement. Ask yourself what would happen if the vehicle was written off BEFORE the end of the loan?
The truth is that a PCP Finance Agreement, as fantastic as it is, is simply a standard Hire Purchase Agreement, with a 'deferred' settlement figure that you can walk away from at the end. Before this point, you could be as financially exposed as any other finance agreement you can find.
PCP Finance and Gap InsuranceLet us look at how a PCP Finance Agreement works:
- You pay a deposit (usually anything up to 30% of the invoice price
- You make monthly instalments for a specified period, anywhere from 12 to 48 months
- You come to the end of the agreement and have a choice to make, either buy the vehicle for the Guaranteed Future Value (GFV) given at the beginning of the agreement, hand the vehicle back to the finance company with no further payments to make or part exchange the vehicle for a new one.
It has to be said that it is a fantastic way of financing a vehicle, that very much puts you in control. However, what would happen if you take say a 36 month PCP agreement, and the vehicle is written off after 20 months?
Well, your 'protection' of your PCP deal only comes at the end of the full 3 years. If the vehicle is written off beforehand, then you would be in the same position as you would be if you were on a normal hire purchase loan. Therefore, if your vehicle is written off through an accident, or is stolen, then your own insurance company will pay the 'Market Value' of the vehicle at this point. This figure may be significantly less than the finance settlement figure you would also owe at this point. This would mean you may face a financial shortfall and be faced with a bill to pay off the finance.
So No vehicle and you have to find funds to pay off the money you owe on it, not a great situation to face.
Unless you took out a Gap Insurance policy on your PCP Agreement of course. Like any other form of Finance Agreement, there are several ways in which you can protect your PCP Finance Agreement with Gap Insurance.
Choices of Gap Insurance for PCP FinanceFinance Gap Insurance - to simply cover the difference between the vehicle market value and the amount you need for the finance settlement. This can be useful if you have only put a small deposit into your finance agreement, and only wish to know that the finance can be covered should the worst happen.
Combined Return to Invoice Gap Insurance - to cover between the vehicle market value and the HIGHER amount of either the outstanding finance settlement or the original invoice price. If you pay a nominal deposit on the PCP Agreement, you could owe slightly more on the finance settlement than the original invoice price at the early part of the agreement. As you make some instalments, the amount you owe will fall below the original invoice price, and so it is the invoice price you will now protect. This type of Gap Insurance can protect any deposit AND any equity you build up in the vehicle.
Combined Vehicle Replacement Insurance - this type of cover will provide three levels of protection for your PCP Finance Agreement. The VRI policy will cover between the vehicle market value and the higher amount of either the outstanding finance settlement and the cost of replacing the vehicle on a 'like for like basis' with the one you bought the policy for. So if you bought a brand new Ford Focus, then it would cover up to the cost of another brand new Ford Focus, same specification or equivalent to the original one. This is the case even if the replacement vehicle costs more than the original. Bear in mind also, if you buy a GapInsurance123 VRI policy, the funds required to replace the vehicle are paid directly to you, and not the nominated dealer. This gives you the choice over what vehicle you have next, you do not have to have exactly the same if you do not wish to.
Although, we firmly believe that the policies you find on GapInsurance123 are the most comprehensive in the UK, there are one or two things that our insurers will not let us cover. Some examples of these would be vehicles over £75,000 in value, claim limits over £25,000, or vehicle types such as Aston Martin.
For this purpose, we are in the fortunate position of having a sister website, EasyGap.co.uk, that can offer cover for many aspects that GapInsurance123 policies cannot. So if you want an alternative Gap Insurance quote, be sure to give EasyGap a try!
Thanks for taking a look at our guide to Gap Insurance for PCP agreements!