- Car gap insurance (or guaranteed asset protection) can be an added insurance for cars that have finance owing on them
- It covers the gap between what an insurer pays if the car is written off or stolen and the amount still owing on a car loan
- There are many pitfalls when it comes to car gap insurance and consumers should tread carefully
'Car gap insurance' is the more common name for motor equity insurance, generally sold as an add-on when you're purchasing or insuring your car.
What is motor equity insurance?
Motor equity insurance covers the difference between an insurance payout and what's left on your car loan if your vehicle is written off or stolen.
Essentially, it protects you against 'negative equity' situations where you owe more on your loan than what your car is worth.
Gap insurance is also well named. Technically, GAP insurance stands for 'guaranteed asset protection' but it also just happens to cover the gap between what your insurer pays out as your car's market value and any outstanding amount you still owe on it.
Car gap insurance example
Sam is involved in an unfortunate end-to-end freeway pile-up and his insurer decides to write off his late-model car.
Its market value for insurance purposes is $30,000. That's less than the $34,000 Sam owes on his car loan, taken out when he purchased the vehicle for $38,000 18 months earlier.
Fortunately, Sam has car gap insurance which will cover the extra $4,000 Sam still owes his lender.
Car gap insurance is also sometimes known as ‘shortfall insurance’ - a more American term, yet it’s a readily available product in Australia. So, do you need it?
When might you consider car gap insurance?
There are a few scenarios where you may want to look at gap insurance, including:
- taking out a no deposit or low-deposit car loan (less than 20% deposit): This can put you at immediate risk of owing more than what your car is worth
- a long loan term: This can particularly apply to five-to-seven year loan terms where there's a risk the car's depreciation rate may outpace how fast you're paying down your loan
- rolling over a negative equity loan: Some buyers may choose to roll over existing debt from their previous car loan into their new car loan, putting them behind the eight-ball before they start
- buying a high depreciation car: Some cars depreciate faster than others, typically electric vehicles (EVs) and luxury, premium-brand cars
- leasing arrangement: Many leasing deals require - or strongly recommend - car owners take out gap insurance
How much does car gap insurance cost?
Like any insurance, the cost of car gap insurance can vary based on several factors, including:
- your loan size
- your equity in the car (size of the deposit)
- make and model of your car
But the biggest factor that can blow out the cost is whether it's purchased via a dealership. Dealers generally levy add-on car gap insurance as a one-off upfront cost to cover the life of the loan.
Let's talk dollars
Car gap insurance can range anywhere between $400-$1,000 (at the time of writing) when purchased through a dealership as a one-off charge.
It is generally significantly cheaper if you source the insurance yourself from specialised insurers or brokers.
Gap insurance can be purchased for between $20-$100 annually (or $2-$15 monthly) through a direct insurer, depending on its assessment of risk.
What to watch out for with gap insurance
As with any financial or insurance product, it pays to read the product disclosure statement, or PDS. There you’ll find a bevy of information about the inclusions, exclusions, and other terms and conditions.
While policies will differ between providers, some general things to look out for include:
Exclusions for rideshare or fast food delivery: Sorry Uber drivers, if you crash your car while on the job you probably won’t be covered in many scenarios - or you’ll have to pay higher premiums on the gap cover.
If your car isn’t a total loss: Your car may be undrivable, but there’s a chance your comprehensive insurer might not pay out the full value of the car due to various reasons. If they don’t pay out in full, your gap insurance might not kick in.
In-house gap insurance: Dealer finance and other financiers may automatically include some form of gap insurance as part of your car loan. But the insurance premium is usually included in the loan amount which you’re paying interest on. How convenient… not!
New for old cover: Some car insurers offer to replace your written-off car with a new one as part of the policy - this obviously negates the need for gap insurance.
Exclusions depending on loan features: Some third-party insurers may not insure you if you have a high car loan interest rate, an unsecured loan, a big deposit, or a hefty balloon payment.
Check car loan interest rates
Signing up to the right car loan can ensure you're getting the best deal for your particular circumstances. This may not always be through dealership finance so it pays to do your research before signing on any dotted lines.
The table below features some of the lowest interest rates on the market and is a good place to start:
Lender Car Loan Interest Rate Comparison Rate* Monthly Repayment Interest Type Vehicle Type Maximum Vehicle Age Ongoing Fee Upfront Fee Total Repayment Early Repayment Instant Approval Online Application Tags Features Link Compare Promoted Product Disclosure
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Savings.com.au's two cents worth
Car gap insurance doesn't have the best reputation in Australia (see below) but it can ease the minds of a select portion of car buyers.
The best advice on whether you need gap insurance is to calculate what you owe on your car loan compared to what your insurer would pay out if you were to lose your car.
If the gap is big, gap insurance could be something you consider. But if you've paid a decent deposit for your car, or have paid your loan down diligently, you may not need it.
Another place to look is in your savings account or emergency fund. If you've got enough cash to cover any shortfall there, paying for gap insurance may not be worth it.
Mind the gap: car gap insurance falls foul of regulators
In 2017, financial watchdog ASIC ordered some of Australia's major insurance companies to refund more than $130 million to customers holding what it termed 'junk' insurance policies, including car gap insurance.
ASIC determined affected customers were sold products, such as gap cover, that duplicated their comprehensive insurance. They also found many customers were paying for gap insurance when they were unlikely to ever claim it, specifically when they had a 20% deposit or more when taking out their car loans.
Insurers were required to cancel the policies and refund hundreds of thousands of affected customers. The companies included Allianz ($45.6m), Swann Insurance ($39m), QBE ($15.9m), and Suncorp ($17.2m).
The federal government's Moneysmart website continues to warn consumers to be wary of add-on car insurance products, particularly those offered via car dealers.
Car gap insurance providers in Australia
Funnily enough, the market for car gap insurance is relatively subdued compared to other insurance products. That said, it's not uncommon for a dealer, insurer, or financier to still offer gap cover when you take out a loan or policy.
Among third-party providers, we’ve found:
- AAA Finance & Insurance
- Aussie Car Loans
- AWN Insurance
- Stratton Finance
- Toyota (Must have purchased a new Toyota vehicle, underwritten by Aioi Nissay Dowa Insurance Company)
- 360 Finance
In the wake of the ASIC crackdown, many major insurers don't specifically offer car gap insurance as a standalone product, making provisions or alternatives for such cover as part of their comprehensive motor vehicle insurance products.
Alternatives to car gap insurance
Still, having negative equity in their car is a scenario some buyers can find themselves in. Cars generally depreciate fastest in the first few years of ownership, which can be the worst time to write it off or have it stolen.
Alas, bad stuff happens that you can't control, so here’s some alternative measures you may find useful. They might not fully cover your butt, but they could mitigate looming financial disasters.
Have a healthy deposit: A 20% deposit can provide a good financial buffer if you crash a car under finance, as it mitigates the likelihood of falling into negative equity, and also reduces the interest payable on your loan.
Shorten the loan term: Choosing a shorter loan term - as short as you can manage - can see you pay your loan off faster and also reduce the amount of interest you pay. This can mean you are building equity sooner and reining in any gap between your car's value and your loan amount.
Pay extra in to your loan: Similarly, paying extra into your loan when you can budget it can reduce the loan size and interest payable, and thus lessen the chance of falling into negative equity. But you need to make sure your financier allows for this.
Insure for agreed value: This might cost more on your yearly policy, but insuring for an agreed value, instead of market value, can prevent a gap in the loan versus the write-off payment.
Get a ‘new for old’ insurance policy: A ‘new for old’ car policy may cost more per year, but it won’t leave you without wheels in the event of a total loss.
Utilising one of these tactics or a combination of them could mitigate the need for gap insurance, which can be a costly product over three, five, or seven years.
