By Lauren Thompson

PUBLISHED: 17:21 EST, 12 June 2012 | UPDATED: 17:21 EST, 12 June 2012

Car buyers are being urged to avoid taking expensive loan insurance sold by commission-driven forecourt salesmen.

Sales of guaranteed asset protection policies are soaring. These policies are also known as ‘gap’ or car depreciation insurance, and are sold when buyers take out car finance deals.

It provides cover for the car’s full purchase price, or total cost of a finance deal, if your car is written off before you have repaid the loan, and usually costs around 300 for three years’ cover.

'I WAS DELUGED BY INSURANCE ADD-ONS'

John Amandini, pictured with his wife Mary, who was deluged with insurance add-ons

John Amandini, pictured with his wife Mary, who was deluged with insurance add-ons

John Amandini, 74, was deluged by insurance add-ons and extras when he bought his new Hyundai ix20 Active car from his local forecourt.‘It wasn’t just a new car they were trying to sell me,’ he says.
‘It was the gap insurance to packages for valeting and even diamond polishing.
‘Do I really need to insure against my insurance company? I didn’t think so.’
He turned them all down after becoming frustrated at being give the hard-sell.
The retired nursing teacher, pictured with his wife Mary at their home in Devon, says the car cost 12,000 but he got it for 7,000 after trading in his  old vehicle.

Car salesmen pressurise customers to take out gap insurance because they typically pocket half the premiums  as commission. But those who want cover can find it cheaper elsewhere.

When you buy a new car, its value will usually drop like a stone the moment you drive it away. Depending on the model, a car can lose as much as 10  per cent to 15  per cent of its value the minute you turn the ignition for the first time.

If it were written off, an insurer would only give you a like-for-like replacement, not a brand-new car — leaving you with a finance deal worth more than the value of the car.

The selling point of the gap insurance is that it would cover the difference. It can also be taken out for second-hand cars.

Two in every three of the 517,493 new cars sold last year were bought on a finance plan offered by a dealer. And a fifth of the 728,971 used cars purchased in the same period were also through forecourt finance. Almost half also bought gap cover.

But complaints about the insurance have shot up by 17  per cent in the past 12 months, says independent complaints investigator the Financial Ombudsman Service. And there are fears this number could rise further given the boom in forecourt finance deals in the past year.

A spokesman for the Ombudsman says: ‘Gap insurance can be useful for some consumers. But we increasingly see cases where sellers have failed to explain the limitations of the cover.’ If your new car is written off, most fully comprehensive car insurance policies offer to cover the cost of a new replacement vehicle during the first 12 months of ownership.

If your car is written off or stolen after this period, you will probably receive a payout worth the car’s current value.

This could be a lot less than you paid since some new cars lose as much as two-thirds of their value within three years, says consumer group Which?

For example, a 12,000 new hatchback bought on finance would typically have repayments totalling 15,000 including interest.

So if the car was written off 14 months later, the insurer would be likely to pay out only its current value of 9,000. The driver would still have the full loan to repay, leaving them 6,000 short. The gap cover would pay off this difference.

Money Mail has previously reported how the City regulator is understood to have concerns about the way some kinds of low-cost insurance were sold  — typically those types of cover taken out alongside another product.

In a trend which echoes PPI — another type of cover sold alongside a loan or credit deal — the Ombudsman says it has seen cases during new car purchases where people did not even realise they had bought the cover.

This is often because it has been bundled up with various add-ons such as an extended warranty or breakdown cover.

The Ombudsman says many car buyers do not understand that:

  • Gap policies do not cover additional purchases such as service plans;
  • A policyholder may be left out of pocket if they paid more than the recommended retail price;
  • Policies often last several years, but provide no refund if they are cancelled early.

If you do still want to take out gap insurance, consider using a comparison website to find the best deal.