Gap Insurance - anyone used it ?

[Laidback]

I haven't heard of GAP insurance for years. I remember when I bought one of my first cars that it was suggested to me. As a private buyer, I always go with NRMA who replace my vehicle new for old in the first 2 years. From that point, I select an agreed value (which is generally in line or above the outstanding loan amount/value of the car). So in this situation I dont think its necessary - however I can certainly see the merit on a leased vehicle or for those using an insurer who do not replace new for old early on in the cars life.

This is the common misconception that the insurance company will pay out your loan as well as your car. Why would they pay you more than they have to? Ever heard of that happening?

Cars depreciate one way while banks recoup much of their interest component or charges up front. That is what creates the GAP. There is NO comprehensive cover that will payout your loan (including new for old because that concerns just the car) on the market. That is why we have GAP insurance. Quite often the comp won't cover many of the options you buy. Ie internal DVD players etc Particularly for 2nd hand cars. I passed on that website because I'd rather people buy through there as oppossed to not buying at all.

As I said I am a car finance broker and 9.5 out of 10 of my clients buy this cover. I always tell them that they don't have to buy it, but when I explain what it does they insist on having it. The other .5 either still don't understand what it does or are frugal which is fair enough. peter@myamb.com
POMI

[elisiX]

Laidback they are replacing the car - new for old. Why would they be paying out the finance? I still want my car. I have an accident so they replace the vehicle in the event of a total write off. The finance company is not paid out but the loan is secured against the new vehicle.

I can appreciate where this might be beneficial under a lease agreement or where the market value is well under the current outstanding balance of the loan, but in my situation, with the benefit of new for old, there is no requirement in the first 2 years.

This is something I may not know about and could be your point. In the event of a total loss, does the loan have to be paid out rather then simply securing the loan against the new vehicle? If not, then I can see why just about everyone would need this cover.

[Dubya]

There is NO comprehensive cover that will payout your loan (including new for old because that concerns just the car) on the market. That is why we have GAP insurance.

That ain't right.

New for old is exactly what you want. Works like magic: You get a new car and your finance just continues as it did before the loss. Beautiful!

Usually offered in first 24 months on new cars and in that period addresses any gap.

[elisiX]

That's what I thought Dubya.

[Corey_R]

Does the insurance company pay the stamp duty and onroad costs in the new for old replacement though? Cause remember the stamp duty is a state tax which goes to the RTA etc, not to the federal government (GST, LCT etc).

[elisiX]

Actually I can recall asking NRMA about this like 2 cars back when they introduced the whole new for old policy. I can distinctly remember being told that they will cover the full cost of supplying a new car and that I am not out of pocket. I can appreciate that in the instance you might want to payout the loan instead of getting a new vehicle you could very well be short, but not if your accepting a new vehicle. Things may have changed and I will speak with NRMA again to confirm, but I am quite sure this is correct.

[Corey_R]

Yeah - that was my understanding of things too... I just wondered if anyone had checked recently. Although so far it really has just been the person trying to sell us GAP insurance that has said otherwise

[Laidback]

Lets say for the sake of the debate that you are right, although I can gurrantee there will be out of pocket expenses with at least an excess payment and probably no refund on premium already paid. Not to mention definte break costs with the financier as the loan has to be re-submitted with changes to VIN, Eng, Reg, Year etc. They will not miss out on their cut.

GAP covers not just New car sales, but Used as well which don't come under a new for new comp policy.

In addition to this; what happens after 2 years? Depending on the loan terms; there could be some serious financial exposure, and the GAP could be at it's greatest based on a 5 year loan. What about the balloon/residual payment? That has not been considered in our discussions yet. What about all those loans that roll over minus equity into the next loan?

Sure GAP may not exactly suit your particular need right now and thats ok, as it doesn't suit every car loan scenario. Ie Dependant on Amount borrowed, deposits (equity) and the term. So to say it's a waste of money is way too general. Additionally it doesn't matter whether it's a Lease, Chattle Mortgage, Hire Purchae, Novated lease, or Conumer loan it is applicable to all, because all cars depreciate and all banks charge for their money they lend.

Most people dont take out 2 year loans and if they do Gap would be an unlikely purchase as equity will be quickly built up and interest charges will be low. Additionally GAP is not necessary with large deposits.

When looking at this debate you must seperate the two companies involved; Comp insurer and Financier, as they are mostly not related. (And if they are, the fiancier has most likely badged a seperate underwriters products to be their own so they still don't own the risk). Both are generally not related, have different shareholders etc and are not in the business of giving or performing magic for free.

GAP is designed to bridge the two.

Within a GAP policy there are generally 3 componets: 1; A finance payout benefit (main option), 2; An extras benefit, designed to help pay the unforseen expenses such as stamp duty and insurance excesses, rego, tools, laptop damage etc, and 3 a no gap benefit for when an accident occurs and there is no GAP payable, they will pay a No GAp benefit.

If you feel you are being sold GAP by a financier in a car dealer that is because they make some money on the product. That asside, It doesn't mean the product is not useful or good value. (Even at their often inflated prices) That's why I sent you the link to the site.

I hope this helps.

[Dubya]

Does the insurance company pay the stamp duty and onroad costs in the new for old replacement though? Cause remember the stamp duty is a state tax which goes to the RTA etc, not to the federal government (GST, LCT etc).

State? Federal? What of it?

RTA gets rego fees, but stamp duty is only collected by the RTA on behalf of OSR. Not that it matters.

[bigmouthmedia]

Does the GAP have to be taken out at the start of the lease ? Or can it be incorporated a little way in - i've already got a few things to account for outside the finance.

[Corey_R]

State? Federal? What of it?

RTA gets rego fees, but stamp duty is only collected by the RTA on behalf of OSR. Not that it matters.

Well it's like when you buy a 2nd hand car from a VW dealer, you still need to go to the RTA to make another payment to them (stamp duty). Hence why I was asking the question....

You're saying that with New for Old you have nothing more to pay, Laidback is saying you're wrong. I'm just exploring, that's all.

[Dubya]

You're saying that with New for Old you have nothing more to pay, Laidback is saying you're wrong. I'm just exploring, that's all.

I said nothing of the sort. But that would certainly be my expectation (less any excess of course). You'd need to check the policy wording to know the facts.

It was elisiX who said the insured would not be out of pocket (per NRMA terms) and you already said you shared the same understanding, (but "explore" away!):

Yeah - that [the insured is not out of pocket] was my understanding of things too... I just wondered if anyone had checked recently. Although so far it really has just been the person trying to sell us GAP insurance that has said otherwise

However, new for old should mean a car in which you can driveaway so that the insured is put back in the position they were in prior to the loss. While insurance contracts contain many exclusions, I would not think that a reasonable, or even likely, one.

As for "Laidback's" comment about car insurance not covering any finance "carried over" from a previous vehicle, of course car insurance is not intended to cover prior loans rolled into the new car loan, especially where they result in a loan for more than 100% of the purchase price.

In terms of the financier being paid out, most finance companies (and all lessors in the case of a lease) demand to be listed as "named insureds" on the contract of insurance as they have an insurable interest.

Financiers will generally be paid out before the registered owner and in full where the policy is for a sufficiently high agreed value.

My expectation is that GAP insurance would be (relatively expensive) insurance of last resort and there would be better ways of covering the finance payout risk (such as an agreed value policy) in the event of a total loss.

Seulement mon deux centimes.

[Corey_R]

That ain't right.

New for old is exactly what you want. Works like magic: You get a new car and your finance just continues as it did before the loss. Beautiful!

Usually offered in first 24 months on new cars and in that period addresses any gap.

Oh, sorry, I guess I misunderstood what you meant by this then... or maybe missed the sarcasm or something, I don't know... my brain isn't working properly as it's -15c during the day where I'm working atm :/

[Laidback]

The whole idea of GAP insurance is to eliminate any loss that you may incurr at the time of accident. I don't think adding the equivalent of @ $200 per year is a lot to pay for GAP.

It's a pretty straight up choice; Do I want to risk my credit rating, and have a potential finacial exposure that could be many thousands of dollars at a time that is completely inconvenient due to an accident for the sake of a few extra dollars a year?

None of us know when we could have an accident, and hopefully no one on this site will ever need to make that claim. GAP Insurance is there at a time that you need to have peace of mind about not being financially out of pocket at a time that you can least afford to be.

With cars and everything associated with buying one, we try our best to beat a system where we all lose money due to depreciation etc.

GAP Insurance eliminates the guess work. Dubya is happy to try the luck to save some money which is completely fair enough. I on the other hand would not take a loan without GAP. We are both not wrong, but I wouldn't convince someone to have it after I'd explained it to them and the just didn't want it for reasons mentioned previously, just as I think a little extra money is not a reason to suggest people shouldn't take it.

We all have different priorities.

[Dubya]

Dubya is happy to try the luck to save some money which is completely fair enough.

Relax, I'm fully covered!

I on the other hand would not take a loan without GAP

However a comprehensive policy with an appropriate level of cover (eg agreed value) can cover such a risk just as well and, one would presume, a lower cost.