What type of insurance will I need with my car finance?

There are three levels of car insurance cover: fully comprehensive, third-party - and third-party, fire, and theft. We look at each one in turn.

7 min read
female motorist on mobile after being involved in a road accident

Do I need car insurance?

No matter whether you’ve just passed your test or are buying your first car on finance, it is a legal requirement in the UK to have car insurance if you own or drive a vehicle. In fact, you need to be insured even if you’re still learning to drive or you always leave your car parked up on the street outside your house, on the drive, or in the garage.

Failing to insure your car can lead to:

  • A fine
  • Points on your driving licence
  • Disqualification from driving
  • Your vehicle being clamped, impounded, or destroyed (in the worst-case scenario)

Of course, insurance isn’t only important because it’s the law. Even if you’re an experienced driver, unexpected hazards and the actions of other road users can put you and your vehicle at risk. Having a robust insurance policy in place provides financial protection and reassurance if the worst does happen and you end up in an accident.

The only time that you don’t need car insurance is if your vehicle is officially registered as off the road. You’ll need to file a Statutory Off Road Notification (SORN) with the DVLA if this is the case.

Types of car insurance

There are three main types of car insurance:

Fully comprehensive

The most thorough coverage you can buy is fully comprehensive insurance. This will protect you, your vehicle, and other drivers from damage - whoever caused it. It typically also covers repair costs, fire damage, and vehicle theft in relation to your car, plus third-party damage to other cars and injury to other people. Depending on the policy you choose, it might also include compensation for legal costs and accidental damage.

Third-party, fire and theft

The next level down from fully comprehensive is third-party, fire and theft (TPFT) insurance. In the event of an accident, this type of policy will cover other people’s costs, their cars, and their property, as well as providing protection for you if your car is stolen or damaged by fire.


The minimum level of car insurance you can have by law in the UK is third party. A policy like this will only cover damage that you cause to other people, their vehicles, and their property. It doesn’t cover any of your own costs.

Can I get car finance with insurance included?

In some cases, you may be able to find car finance with insurance included. Typically, car finance and insurance packages are available when buying a brand-new car, but some car finance brokers can also offer all-inclusive deals on used vehicles. In this case, your monthly insurance premium would be combined with your car finance repayment. Other packages include servicing, which can also be incorporated into your monthly payment.

These types of deals could work for you if you struggle to keep track of your different bills and payments and would appreciate the simplicity of having both payments in one. However, be aware that you might not have access to the same range of policies when opting for an all-inclusive package and you may not be able to tailor the insurance to suit your individual circumstances.

Car insurance for young drivers

Young drivers often face the highest car insurance premiums. In fact, data shows that, on average, drivers in their 20s pay £211 a year more than those in their 30s. It’s all down to risk. Young drivers are statistically more likely to be involved in road traffic accidents than their older counterparts, and it’s estimated by the road safety charity Brake that one in five new drivers has a crash within the first year of passing their driving test.

When buying your first car, you also won’t have had the chance to build up a no-claims bonus to demonstrate that you can be a safe and responsible driver, which can increase your insurance costs. A no-claims bonus is a discount on car insurance for not making a claim.

If you’re looking to reduce your premium, there are steps you can take to secure cheap car insurance at any age. Keeping your car in a secure location overnight, choosing a model from a low insurance group, driving carefully, paying for your car insurance annually, and adding a second, more-experienced driver to your policy can all help to reduce your insurance costs. Don’t be afraid to shop around to find the best deal for you.

What is gap insurance?

Gap insurance (otherwise known as guaranteed asset protection insurance) covers the difference between your outstanding car finance balance and the payout you receive from your insurance company if your car is written off.

With the exception of classics and rare collectibles, all cars depreciate over time. In fact, a typical motor will lose up to 60% of its value in the first three years. Your standard car insurance will compensate you if your car is written off or stolen, but only to the tune of what the car is currently worth, which could be a lot less than you originally paid or financed! That means when you go to replace your car, there’s a gap between the amount you originally paid (or still owe to your finance provider) and the budget you have now. Gap insurance is designed to plug that gap.

Of course, terms and conditions apply. Different insurers have different exclusions, but typically, you’ll need to have fully comprehensive insurance, the policy will only pay out if your car is stolen or completely written off, and the compensation won’t cover any modifications you’ve made to the vehicle, such as upgraded wheels.

What types of gap insurance are there?

Like standard insurance, there are several different types of gap insurance available:

Return to invoice gap insurance

Return to invoice (or RTI) insurance will cover the difference between the amount you paid for the car and the payout you receive from your insurer. This can help to protect any money you invested in the vehicle, including your cash deposit or part-exchange.

Vehicle replacement gap insurance

If your car has been written off, you’ll likely want to get back on the road as soon as possible. Vehicle replacement insurance pays the difference between the payout you receive from your insurer and the amount you’d pay to buy a like-for-like vehicle.

Finance insurance

If you bought your car on finance, this type of gap insurance on a car is intended to cover the difference between its current value and the amount you still owe on your finance agreement. Without this type of insurance, if you receive less compensation than you owe on your car loan, then you would still be responsible for paying the finance company until your agreement ends or you’ve paid the settlement figure, even if you no longer have a car.

Contract hire gap insurance

Leasing a car is becoming increasingly popular, but like car finance, you might be liable to continue making payments on your lease if your vehicle is written off. With contract hire gap insurance, your standard car insurer will cover the current value of the car while the gap insurance will pay for any outstanding lease payments.

Should I get gap insurance?

Gap insurance is optional. Whether it’s the right choice for you will depend on your personal circumstances. If you have car finance, it might come in useful, as you will be expected to continue making repayments on your loan if your standard insurance payment doesn’t cover the full amount, even if the car’s been written off. In this case, you could be left having to cover two finance payments each month – one for your old car and one for your new vehicle – or left without a car at all if your budget can’t stretch further. This could be particularly important if you have bought a nearly new vehicle that’s only two or three years old and is losing value rapidly.

It is worth considering the age of your car when deciding whether to take out gap insurance. As the rate of depreciation tends to slow down over time, there may come a point when the gap between the amount paid for an older car and its current resale value is less than the cost of gap insurance.

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

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