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Financial product: Gap insurance

Last updated 05:00 20/07/2014

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Product: Gap insurance

Offerer: Several insurers including Marac Insurance and Autosure

Offer dates: Available to used car buyers

How it works: When people buy used cars from car yards they often do it using finance provided by a finance company such as Marac.

That brings them various risks. One is the risk that if the car they have bought is stolen, or is written off in an accident, they can end up owing more than the insurance payout they get as a result. That'd leave them with no car, but still owing the difference between the insurance payout and the amount they still owe the loan company.

Take this example, from Marac Insurance. If you owe $16,000 on your car but its insurance value is $12,000, if it is stolen you will have a shortfall of $4000 still to pay on your loan. This is the shortfall covered by gap insurance.

As with all insurance, buyers must read the fine print. A major "exclusion" in the Marac Insurance policy, for example, is that no claim will be paid if your car insurer refuses to pay "the full market value or the full agreed value" for any reason whatsoever. That can happen in cases where the insured was breaking the law at the time of the damage (ie they were under the influence of alcohol), or if they were grossly reckless (such as leaving the keys in the ignition while popping into a bakery for a pie).

Also, if you let your car insurance lapse, the policy wouldn't pay out a cent. Other things excluded in the contract include claims caused by earthquakes. Also note, gap cover may not cover all the debt you still owe. It won't cover things like arrears and penalty charges and interest. It may also not cover early repayment charges, which is a major gap in gap insurance coverage.

What we like: Borrowing money brings risks. Insurance reduces the chance of awful stuff happening which leaves the borrower financial disadvantages, and in extreme cases, ruined. Loan repayment insurance provides some cover against a borrower being unable to repay if they lose their job, fall sick or die. Gap insurance, which is sometimes called ‘loan equity insurance" covers a different gap.

What we don't like: While gap insurance has a place, it also leaves you wondering whether it allows lenders to be more relaxed about whether borrowers are overpaying for vehicles. A crash on the way home would leave many buyers owing more than the amount they owe the financier.

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Conclusion: Insurance is a cost of car ownership and borrowing to buy a car. Car insurance is essential. Gap insurance less so. Drive carefully, and get a steering lock.

- Sunday Star Times

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