Can Gap insurance beat falling car values?

The value of new and used cars has taken a battering over the past year, as sales collapse, and sellers are forced to slash prices.

While this has spelt good news for car buyers hoping to save on their purchase, it has caused headaches for those unlucky enough to have their car written off or stolen. These will find insurers only pay out the current market value of the car, which may fall far short of what they paid for their vehicle.

Increasing numbers of those who have borrowed to fund their car purchase are turning to Guaranteed Asset Protectioncredit negative equity (Gap) insurance to 'calm their fears over falling car prices', according to the Finance and Leasing Organisation (FLO).

This insurance covers the difference or 'Gap' between the value of a car before it was written off or stolen and the amount of money originally borrowed to buy it.

It is available on both new and used cars.

For example, if a person borrowed £12,000 to buy a car and it was written off a year later, their fully comprehensive insurance would only cover the value of car after depreciation, say £10,000, leaving the owner with a £2,000 deficit.

Gap insurance covers this deficit so the borrower is not left out of pocket and can ease the fears of buyers less keen to take out a car loan due to rapidly falling prices leaving them out of pocket, says the FLO.

The decline in car sales has been so rapid over the past year, it has forced the Government to look at ways of getting more people to take out car loans in order to help the ailing UK motor industry.

Business secretary Lord Mandelson said last week that the Government is considering injecting cash into motor-based finance firms, which should help them to stimulate car sales through cheaper loans.

Although new car sales grew slightly over the past year, they fell by a dramatic 12% between August and October, according to recent figures from the Society of Motor Manufacturers and Traders.

The problem of falling car prices deterring buyers is particularly acute for more expensive vehicles, from higher mid-range to luxury cars, with prices plummeting due to the and also the huge depreciation quickly after leaving the showroom, according to AA Financial Services.

It has seen an increase in the number of customers taking out Gap insurance on sales through its dealerships recently. Approximately a fifth of all of its sales now include Gap cover.

Ian Crowder from AA said: 'This type of insurance is coming into its own by encouraging people into buying a car who may be nervous about doing it at this time. Cars are losing value fast and buyers are getting into very quickly if anything goes wrong. People are staying clear because resale values are so much lower than they used to be.

'But it seems an increasing awareness of Gap may be an encouragement to them.'