Another rip-off insurance to avoid

Car dealers don't just sell cars -- they also flog finance, insurance and other add-ons. Alas, one type of car insurance is terribly poor value...

When you walk into a car dealership, you may believe that you're there to buy a vehicle. While this is partly true, the salesman/woman has other ideas, because he wants to sell you something more: a CLIO. I don't mean the Renault model; CLIO is my acronym which stands for Car, Loan, Insurance and Other add-ons.

Privately, many dealers will admit that they're not interesting in selling only cars. By also selling you an F&I (finance and insurance) package, they can make far higher profits. Thus, much of the training provided to dealer salesmen and business managers focuses on the art of selling F&I, not cars.

Mind the GAP!

The optional extras and add-ons sold in dealerships can add thousands to the cost of a new or used car. For example, a car with a price tag of, say, £10,000 can easily end up costing £15,000 once a finance agreement, the dreaded payment protection insurance (PPI) and other rip-offs have been bundled in.

As you may know, I've waged a seven-year war against PPI. Thanks to a lack of effective competition, overpriced PPI was frequently mis-sold to unwary borrowers. Although the Financial Services Authority (FSA) decided to ban its promotion at the point of sale, other horrors lurk in car dealerships.

One of the worst is GAP insurance, which is designed to stop you being out of pocket if your car is stolen, written off or destroyed by fire. Guaranteed Asset Protection insurance arrived in the UK from the US in the early Nineties and has grown steadily since then.

Let me show you how GAP works: you buy a car using a five-year loan arranged by the dealer. The TAR (total amount repayable) is £12,000. After eighteen months, your car is written off in an accident caused by another driver. You motor insurer offers you a settlement of £6,000, but the settlement figure on your finance agreement is £7,000. In other words, you're £1,000 out of pocket!

In short, GAP covers the shortfall between your insurance payout and the outstanding balance on your credit agreement. In this respect, it's a bit like 'depreciation insurance', as it covers you against the falling market value of your car.

In theory, GAP insurance sounds like a good idea, because it protects consumers against an unexpected financial shortfall. However, GAP insurance has much in common with PPI, in that it is massively overpriced, poorly understood, and sold using high-pressure sales techniques. In other words, it's another example of what I call the 'captive audience' problem.

Scrap the GAP

Alas, when buyers find something difficult to value and understand, then sellers are all too eager to take advantage of this ignorance. For example, I've seen dealer GAP policies selling for £700 that can be bought independently for £100 or so. In other words, dealer GAP can be five to ten times as expensive as its stand-alone rivals. The reason for this is that GAP cover provides bumper commissions for the salesman, dealership and finance company. In fact, the only loser is the poor old buyer!

Indeed, in my former life as a marketing manager for a leading insurance firm, I used to manage GAP insurance portfolios. These were hugely profitable, as the payouts to claimants were, say, a tenth (10%) of the premiums collected, leaving a profit of 90% to be shared among the insurer, finance company and car dealer.

In summary, my advice to you is to 'scrap the GAP', as it belongs on the scrapheap along with expensive dealer payment protection insurance, extended warranties, breakdown cover and so on. If you don't shop around for your own policy, you could end up paying five times as much as you should for this cover. Try this Google search to look for low-cost, independent GAP insurance.

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