If you are reading your gap insurance documents you may well see a term which talks about Negative Equity?
So what is Negative Equity ?
Why will your gap insurance policy not cover you unless in most cases you pay an additional premium?
Negative equity is where you owe more on the cost of t=your vehicle than it is worth. For example your vehicle is worth £10,000 but you still have £12,500 outstanding on finance.
Negative Equity is normally not a problem as you would simply carry on making your payments and eventually the amount you owe will be less than the value of your vehicle. In fact right now today in the UK there will be millions and millions of vehicle owners in negative equity.
The only time that this negative equity can really be any issue is if your vehicle is written off or your decide to change it.
If your vehicle is written off ( assuming you where in negative equity ) and you do not have any form of gap insurance then unfortunately you may be left having to pay for a vehicle you no longer have. Or alternatively if you change your vehicle and your dealership adds the amount of negative equity you have from your old vehicle onto the cost of your replacement.
This is because gap insurance is designed to protect the car the have just bought and not any financial liability from your old car. ( that is unless you have declared).
For example you buy a Volkswagen and pay £8,000.
You still have negative equity from your old car of £2382.
Your dealership arranges finance for you of £10,382.
If you had a standard form of gap insurance and your vehicle was written off no matter if you had bought finance gap insurance or return to invoice any settlement would be based on the purchase price of your vehicle i.e the £8,000 and not the £10,382 that you borrowed.