Hire Purchase or Lease Agreement - Gap Insurance

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Gap Insurance with a Contract Hire or Lease agreement

The amount of money needed to end a Leasing and Contract Hire agreement is significantly higher than most other means of financing the purchase of a vehicle.

Additionally many of these agreements legally require the entire balance of the rental to be paid off in full even in the event of a car being written off. This is to ensure the leasing company’s profits are not affected and the agreements are not compromised.

Funding the lease

Therefore a motorist could face having to fund the leasing agreement despite not having the advantage of the vehicle due to it being written off by their insurance company.

A leasing company would perform a number of calculations similar to these in order to determine the Contract Hire or Lease settlement in the case of a leased vehicle being written off due to accident or theft.

For example, If a vehicle originally costs £20,000 before VAT and the monthly rental is £375.00 plus VAT over a three year term. If the leased vehicle was written off after 12 months, leaving twenty-four months outstanding on the lease equating to £9000, the leasing company, may have been expecting to sell the car at the end of the lease for approximately 50 percent of the purchase price £10,000 the total outstanding cost of the agreement would be £19,000.

Insurance policy

The insurance policy for the car may for example pay out £14,000 leaving the motorist with a shortfall of £5000 without taking into consideration a deposit for a new lease or any VAT.

It is clear from these calculations that unless a claimant has superfluous amounts of money laying around they would need a Gap Insurance policy to cover the costs.