GAP Insurance? What a rip-off...

[MarkCup]

[FONT=verdana,arial,helvetica,sans-serif]I got sent this earlier and thought it might be useful to some. Maybe a mod could sticky this?[/FONT]


[FONT=verdana,arial,helvetica,sans-serif]Written by Cliff D'Arcy of www.fool.co.uk[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]In today's 'The Good, The Bad and The Ugly' email, I'm looking at a particularly unattractive car insurance policy.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Guy Hands, the owner of Odeon, the UK's largest cinema chain, recently remarked that he was in the popcorn-selling business, not the film industry. Likewise, when you go to a car dealership, you expect to be sold a car. However, dealers make substantial profits from selling add-ons, particularly what the trade calls 'F&I'.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Indeed, selling finance and insurance (F&I) can be far more lucrative than 'moving metal'. So, when a car salesman (or saleswoman) targets a customer, he aims to sell as many of the following products as he can:[/FONT][FONT=verdana,arial,helvetica,sans-serif]

• A vehicle;
• Various specification upgrades and extras (metallic paint, rust-proofing, car alarm, etc.);
• Extended warranty;
• Car finance (often a hire-purchase agreement);
• The dreaded payment protection insurance;
• Car insurance;
• Breakdown cover; and;
• GAP insurance;

[/FONT][FONT=verdana,arial,helvetica,sans-serif]Together, these 'optional extras' can add thousands to the cost of a car and, therefore, £100+ to your monthly repayments. Alas, the brutal reality is that these add-ons are worth far more to the dealer than they are to you. That's because he earns handsome commissions from the sale of these products, particularly F&I.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]In Mash Your Motoring Bills, I criticised many of the above add-ons. Today, I'd like to show you why GAP insurance is best avoided. GAP (Guaranteed Asset Protection) insurance is yet another financial product which originated in the US and then took off over here. In a nutshell, it covers the 'gap' between the insurance payout following a write-off and the outstanding balance on a related finance agreement. Here's how it works in practice:[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Where's The GAP?[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Let's say that you buy a car for £10,000 on credit over five years. Thanks to interest and other charges, the total amount repayable on your loan is, say, £12,500. Now let's fast-forward two years, when your car is written off following an accident, fire or theft. Your motor insurer then offers you a settlement to enable you to replace your car.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Alas, thanks to depreciation, your motor insurer estimates that your car is worth only £5,000, so it refuses to hand over more than this. However, your loan still has three years to run and, after early settlement charges and an interest refund, will cost £7,000 to repay. Thus, you have a 'gap' of £2,000 between your debt (£7,000) and your motor-insurance payout (£5,000).[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]This is when GAP insurance rides to the rescue, as it promises to pay the shortfall to the finance company in order to clear your debt. Thus, you're no longer out of pocket and everyone's happy, right? Alas, it's never that easy.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]The problem is that motorists find GAP insurance difficult to understand. Hence, they are unable to place a value on it -- and dealers are only too willing to prey on this ignorance. In short, GAP insurance is a money-spinner for dealers, who charge as much as they possibly can for this cover. In return, they receive fat commissions for giving GAP insurance the hard sell.[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]For example, a dealer may urge you to buy GAP insurance, claiming that 'it's very popular these days and most motorists buy it'. A typical premium might be around £400, of which at least half will go to the dealership in commission. Of this £200 commission, the salesman may be paid £100, so it's very much in his interest to convince you to 'mind the GAP'![/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Before I started writing for The Fool, I ran large insurance portfolios for leading motor-finance firms. Indeed, I managed a number of GAP insurance accounts, all of which were vastly profitable. For the record, I would estimate that loss ratios on these schemes came to a mere 5%. In other words, for every £20 collected in premiums, only £1 was paid to claimants. Thus, GAP insurance is massively overpriced and should be given the 'bargepole treatment'![/FONT]

[FONT=verdana,arial,helvetica,sans-serif]Finally, if you do want the peace of mind which GAP insurance offers, then shop around and buy it from an independent provider -- never from a dealership or finance company. A quick Google search led me to the following providers of stand-alone cover, all of which undercut dealer-bought GAP insurance by a huge margin:[/FONT]

[FONT=verdana,arial,helvetica,sans-serif]ala.co.uk | car2cover.co.uk | DirectGap.co.uk | gapcover.co.uk | gap-insurance-online.co.uk | gapmyinsurance.com | gap-uk.co.uk | getmegap.com | HCforYou.co.uk | SurfAndProtect.com [/FONT]

 

[Beef-Mc]

Were Renault not offering this when you took out finance?

 

[d4ve86]

GAP insurance is the biggest mark up, my dads in insurance and when he got his new car last month he could not believe the prices they charged for GAP

 

[alexbleubolt]

not really i took it, it was only £330 and covers the value of the car for 5 years, and being a clio 197 i am sure it will loose at least 4k in that time period

 

[-Leigh-]

I was offered it when I bought my 182, second hand.

I did laugh at the salesman.

 

[alexbleubolt]

i can understand if your cars second hand, but my car was new, and brough without finance, so it will be covered for the value i paid for it for the next 5 years for a one off payment of £330,

 

[Steve]

^^^ Oh dear.

It's like loan protection whoever takes that out

 

[-Leigh-]

i can understand if your cars second hand, but my car was new, and brough without finance, so it will be covered for the value i paid for it for the next 5 years for a one off payment of £330,

I got offered it with my brand new Punto too. I also laughed then lol. It's a rip off.

 

[Bluebeard]

The product itself is a very good product. I once sold a new laguna to someone for £18k, and a GAP policy for £299. 2 years later when it was written off by a drunk driver, GAP stumped up £5500 shortfall between his cash price and insurance valuation. So was he ripped off when he paid the £299 GAP fee???!

No.

 

[-Leigh-]

There's no way in hell I'd pay £300 odd, just incase I may crash my car. I expect it to de-value in time.

Why should I pay for the salemans xmas do lol.

 

[alexbleubolt]

There's no way in hell I'd pay £300 odd, just incase I may crash my car. I expect it to de-value in time.

Why should I pay for the salemans xmas do lol.

thats why you got a second hand one, if you had paid £17k for a new car, whats an extra £300 to protect the value for 5 years ? like chap said, anything can happen, a tree can fall on your car, a lorry can reverse into it, it could get blown up in london,

 

[MarkCup]

But you're not protecting £17k of value, you're protecting the difference between its depreciated written down value (according to the insurer) and how much is outstanding on finance at the time you write it off.

The main point of the article is that if you buy it from a dealer when you buy the car, you get ripped-off.

It's like buying buildings cover from your mortgage provider, or payment protection cover from a loan provider. These are all massively overpriced.

Best bet if you really feel you need this cover, as the article states, is to shop around.

 

[172.com]

I bought the GAP. Refused it two or three times, but he wouldn't give up. Didn't end up paying that much for it in the end, so I didn't get ripped off as he kept lowering the price. Yes, I may never use it, but if I do need it, it will be good. It's just a gamble at the end of the day. I'm actually hoping somebody will drive into the back of me between now and christmas lol.

 

[MarkCup]

The product itself is a very good product. I once sold a new laguna to someone for £18k, and a GAP policy for £299. 2 years later when it was written off by a drunk driver, GAP stumped up £5500 shortfall between his cash price and insurance valuation. So was he ripped off when he paid the £299 GAP fee???!

No.

Err, very possibly.

He'd more than likely have been able to get equivalent cover from a third party provider for a lot less than £299.

The article isn't saying that the cover provided is a waste of time, just that dealers that sell it with cars...massively overcharge for it - then reap the reward come pay-day.

 

[Initiale]

Unless you have a particularly dodgy finance deal (extortionate interest and hugh early repayment penalties) or if you've paid no deposit (and therefore in negative equity for the first half of the finance agreement) then GAP isn't worth it IMO.

 

[A13EX F Trophy No70]

if you write of a car within a year of it's first registration date they replace it with a new one anyway it's in most policys

 

[-Leigh-]

There's no way in hell I'd pay £300 odd, just incase I may crash my car. I expect it to de-value in time.

Why should I pay for the salemans xmas do lol.

thats why you got a second hand one, if you had paid £17k for a new car, whats an extra £300 to protect the value for 5 years ? like chap said, anything can happen, a tree can fall on your car, a lorry can reverse into it, it could get blown up in london,

Read my son, READ!!

I also bought a BRAND NEW Punto previously. And refused it.

 

[Scaggeh]

When my Mum and Dad bought their new car cash, the salesman tried to flog them GAP insurance. Soon stopped talking when I pointed out it comes as standard for the first year with their insurer.

I can understand why people might take it when buying a car on finance, but it seems most financial products these days have lots of useless expensive addons attached, best to read the small print and do the maths before signing anything..

 

[richard1]

Everythings worth what someones prepared to pay for it.

I've had many a customer made up after having claimed on their GAP insurance and given me a fifty for my 'good advice'

Bearing in mind a lot of peeps pay HUGE insurance premiums per year for their 'main' annual premium, is £100 per year really that bigger a rip off?

Everyone has to make a living somehow... its how the world goes round.

 

[MarkCup]

...is £100 per year really that bigger a rip off?

It is if a directly comparable policy is available for 50% less.

Isn't it?

 

[BYRON]

pmsl at this thread. Those that are knocking it, clearly havent had real experience of it.
I agree that you should shop around to get the best price, but as has been said - whats £300 odd quid in the grand scheme of things? If your insurance shortfall is anything more than that, then surely it has paid for itself.
Seems many of you are blinkered.

To note, I have paid a GAP premium of £52.50 on a new car for the life of the deal. No commission is paid to the sales person for the the product as it is defaulted into the quotation at inception.

 

[richard1]

GAP insurance is regulated by the Financial services authority, therefor the supplier must be 'transparent' and treat the customer 'fairly'

Im sure if the FSA thought the general public were being ripped off, then every dealer in the land would be heavily fined and possibly closed down.

Likewise, if car dealers and many other retail outlets didn't make money from 'add-on' products they would close down due to ever decreasing operatring margins.

This would eventually lead to a reduction in new car production and the general decline of the motor industry resulting in a poorer economy.

 

[MarkCup]

GAP insurance - for every £20 collected, £1 is paid back out to claimants (5%).

House/buildings insurance - for every £20 collected, £16 is paid back out to claimants (80%).

Is that good value - or is it just a serious money spinner for the insurance company?

People's ignorance of the true value of these policies is being preyed upon.

 

[MarkCup]

Seems many of you are blinkered.

Not me. I've stated from the outset that for some people these policies are useful.

The point I'm trying to make (very unseccessfully it seems judging by these responses) is that if you buy it from a dealer when you buy a new car, 9 times out of 10 you have paid way too much.

Why would you pay a dealer £300 for something that you could by on the high street for £75?