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Our insurance pay out for a write off only covers the outstanding finance - is this correct?

My stepson bought a car on finance two years ago on a four year contract. He's had an accident and it's a probable write off, but the insurance company will pay out what the car is worth. They will only pay about £7000 which will pay off the outstanding balance but leave him with no car and no money, is this correct?

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Yes, the insurer will pay the market value at the point of loss, if the vehicle is on finance, there is no guarantee the amount paid by the insurer will cover the finance. This is why it is always a good idea to get GAP insurance if you buy a car on finance.
The car will have depreciated from when it was initially purchased and you can often end up owing money on a car you do not possess due to the amount of finance you have agreed to.
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