In Australia, it's a legal requirement for car owners to have compulsory third-party (CTP) insurance so that if you injure someone else, you're covered for your liabilities. You won't be covered for damage to another vehicle, legal costs, or for damage to your own property or person with this insurance.
What is Compulsory Third Party (CTP) car insurance?
Everyone registered to drive on the roads must have CTP, to cover the costs if they injure another person.
Depending on what state you live in, you may have to pay your CTP before you renew your car registration or pay your CTP with your car registration.
In addition to the CTP insurance you need to have, you may also want to consider Third Party Property insurance or Comprehensive car insurance.
What is Third Party Property (TPP) car insurance?
Third Party Property covers the costs of damaging another person's car or property if you are at fault. It does not cover you for theft or for the costs involved in repairing or replacing your own car if it damaged in an accident.
What is Comprehensive car insurance?
Comprehensive insurance covers you in the event of an accident or if your car is stolen.
It means that you can replace your car or get it repaired, as well as get legal help and money to repair or replace any other property of yours that's damaged or stolen. You're also covered for damage caused to another car or property and legal expenses incurred as a result of an accident or theft, either for yourself or for someone you injured.
Having a car loan changes your insurance requirements
If you're financing your car, however, even if it's a refinance car loan, then you must have more than just CTP or third-party insurance on it.
This is because your car finance provider will need to replace the vehicle if it's written off, as well as recoup the outstanding amount of the loan you have on it. You must have comprehensive car insurance while you're still paying your personal car loan off to cover not only your damages but to make sure your lender isn't out of pocket.
What is car gap insurance?
Gap insurance, also called shortfall insurance, is an add-on to comprehensive insurance.
Your car is losing value all the time and it may not be worth what you still owe on your car loan, if it is written off and has to be replaced.
When you factor in the rapid depreciation of cars, you can see why having extra cover is useful. If your car is damaged beyond repair and its market value has fallen quite some way, then you could be faced with a huge bill, which even the lowest car loan rates won't make any smaller.
Is gap or extra insurance worth it?
The usefulness of gap or shortfall insurance depends on the terms of the policy, and you need to pay close attention to the terms and conditions. Your gap insurance policy will not pay out if your car insurance doesn't, and you will also need to meet the terms and conditions of the car gap insurance policy.
You can only get gap insurance if you have a comprehensive insurance policy. You probably won't be able to get this cover if you have only the more basic policies, like third-party, fire and theft or CTP.
Making sure your loan is suitable for gap insurance
Gap insurance providers may refuse cover if your loan has very poor terms, which is why you need to compare loans carefully to make sure you're eligible for this extra cover.
Stay away from high interest rates more than 10 per cent is probably too high for gap insurance. Low interest car loans should be around six or seven per cent.
If you have a high balloon payment (more than 50 per cent of the car's market value), your gap insurer may not want to know.
You should also aim for secured personal loans and get your car loan through a lender rather than from a dealership.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.