Do I need PPI and Gap insurance when buying a car?
PPI and GAP insurance are additional add-ons included in many mainstream car credit agreements. However, how important are they? The salespersons seem to think they're essential, but finance experts have been very critical of PPI and GAP insurance, saying "this is a way for unscrupulous creditors to get more money out of vulnerable people."
What is GAP and PPI?
GAP (Guaranteed Asset Protection) insurance is to cover the cost of paying the difference between how much a car costs and how much more the creditor charges (in interest and other fees.) Effectively, the associated car costs after the car insurance has been paid if the car was written off or stolen.
PPI (Payment Protection Insurance) is similar because it covers unforeseen costs too. However, PPI is meant to cover repayments if the car owner cannot pay due to illness, unemployment, or a personal accident.
What laws govern these?
There are no reasons why you must purchase PPI or GAP by law, however, some companies stipulate that in order to lend money to you, you must take out PPI, GAP, or both. This is frowned upon by many financial experts because in some cases the PPI and or GAP insurance can cost the borrower far more than the car itself. If you pile high interest rates on top, you could be paying 21,000 for a £7,000 or £4,000 second hand car.
One lender who has faced heavy criticism is The Funding Corporation, who are used by many small car dealerships to make credit agreements. They require those signing up for credit agreements with them to take out both PPI and GAP insurance.
Why is PPI and GAP used?
According to The Funding Corporation, poor credit car finance is, "a sector in which very few people make regular payments, and in fact, at any one time 40% of them are in arrears". This is how they justify that people take out GAP and PPI. They suggest high risk borrowers should have to pay more as their repayments are often unreliable.
The Financial Services Authority is currently scrutinising practices by companies such as The Funding Corporation in order to assess claims that the charges for these insurance plans are too high and also claims that they are being sold incorrectly.
In the case of one customer who was rushed through the credit agreement process without being told any total figures she would have to repay was simply told she needed this, and then sent on her way. It wasn't until she got home that she realised that her £6,500 second hand car was now going to cost her around £21,000 due to high interest rates, PPI, and GAP insurance added on top.
Experts advise potential borrowers, "Even if you love a car from one dealer, go to a reputable creditor who does not demand you pay PPI and GAP insurance in order to acquire the funds to buy it."