Can you get GAP insurance if you used a personal loan?
Buying a new car is a substantial financial investment, because of this, many people choose to buy a car using some kind of loan. If your new car gets written off before you have paid off your vehicle loan, you will be left with a sizeable financial shortfall to cover, which includes any outstanding loan balance and the car’s depreciated value.
Guaranteed Asset Protection or GAP insurance offers to help cover this financial shortfall in the event of a total loss. The most common type of GAP protection, Back to Invoice insurance, will pay the shortfall between the comprehensive car insurance payout and the car’s original value (or the outstanding loan balance, whichever is higher).
Here, we discuss a personal loan and the GAP insurance coverage options if you have bought your car using a personal loan.
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What is a personal loan?
A personal loan is a type of loan referred to as an unsecured loan, a debt consolidation loan or a signature loan. These types of loans are currently taken out to help deal with significant one-time expenses or to repay credit card debt, because the interest rates for personal loans are usually lower than for credit card debt.
People often purchase cars using an auto loan, through Personal Contract Purchase , a secure loan. It is secure because the vehicle itself is used as collateral if you default on your repayments; this protects companies from loan payment failure. A personal loan does not have any collateral, which can make interest rates higher than secured loans and your credit score will be affected if you default on your repayments.
It is not always simple to get a personal loan. Certain factors are taken into consideration before your loan can be approved:
- Credit score – the lower your credit score, the higher the chances of securing a personal loan; it is evidence that you are financially trustworthy.
- Income – or, more specifically, the income-to-debt ratio. If you have lots of debt relative to your income, you may be less likely to secure a personal loan.
- Credit reports – Certain items on your credit report, such as unpaid loans, may reduce the chances of securing a loan, even if your credit score is good overall.
Can you get GAP cover if you use a personal loan?
A GAP insurance company usually offers policies to cover vehicles bought on using a car loan so that if your car is written off, you will not be repaying a loan for a car you no longer own. However, some people take out personal loans to buy their vehicle as these may be easier to secure if you have bad credit.
Getting GAP protection for personal loans is possible, but it is less common. GAP coverage on personal loans works the same way as policies on auto finance loans. If your car is written off, GAP insurance will pay the difference between your motor insurer’s comprehensive insurance payout and the vehicle’s original value, or the remaining loan amount, whichever is higher at the time. GAP insurance with ALA doesn’t cover negative equity, so if debt has been carried over from a previous vehicle, this additional amount will not be covered.
If you have bought your car using a personal loan, it is important that you find a GAP insurance company that offers insurance for this finance type.
Why is it important to get GAP cover if you used a personal loan?
Getting GAP insurance on the car you bought using a loan is helpful because it helps ensure that you are not left paying off debt for a vehicle you don’t even own anymore. GAP coverage for cars bought with a personal loan is especially important. Here we explore why.
- Interest rates are much higher for personal loans than auto loans, so your monthly repayments will be larger. Repaying large monthly sums for a car you don’t own can put you under a more significant financial strain.
- GAP insurance is crucial to avoid being in a significant financial shortfall. Car depreciation combined with your outstanding loan payments can leave you with a large financial shortfall in the event of a total loss.
- GAP insurance is especially valuable for fast-depreciating car brands/models such as the Audi A6 or the Peugeot 508 since the potential financial shortfall with a personal loan will be greater.
How to get GAP insurance with a personal loan
Not every GAP insurance company offers policies for cars bought on a personal loan, so it is important to look carefully for a provider who offers this. ALA GAP insurance can provide GAP coverage for vehicles bought outright , on car finance and with a personal loan. Contract Hire GAP insurance is even available if you buy your car on hire purchase .
If your car is written off, ALA will pay the shortfall between the comprehensive insurance payout and the vehicle’s actual cash value or the outstanding loan balance, whichever is higher at the time. Even though we cover vehicles bought with a personal loan, certain other requirements need to be met for you to get GAP coverage on your car.
Get a GAP insurance quote today and see how much money you could save
Frequently Asked Questions
Do you need GAP insurance if you pay cash?
GAP coverage is not a legal requirement but protects you from a significant financial shortfall in the event of a total loss. Even if you bought your car outright , it would still lose value over time; GAP insurance covers this depreciation.
Can GAP insurance cover negative equity?
Some GAP insurance providers cover negative equity – if you have carried over auto debt from another vehicle. However, ALA currently does not offer this. If you need negative equity cover, look for a GAP insurer who offers this
How does GAP insurance work on a financed car?
If your car is written off, your standard car insurance company may only pay the market value of your vehicle at the time of the write-off. GAP insurance offers to pay the shortfall between this payout and the original value of the car or the outstanding loan balance, whichever is higher.
What different types of GAP insurance are there?
Most GAP insurance providers offer Back to Invoice insurance, Vehicle Replacement GAP insurance and Contract Hire GAP insurance (for if you bought your car on lease). ALA also provides Agreed Value GAP insurance. Read more about our GAP policy options here