Revealed: the hidden cost of insurance extras when buying a new car

Car dealerships are charging people huge mark-ups on auxiliary insurance to protect cars from cosmetic damage and being written off, new Which? research has found.

We looked at the cost of Guaranteed Asset Protection (Gap) insurance at four car dealerships and seven insurers.

Gap insurance is designed to cover the difference between the amount your insurer pays out if your car is stolen or written off, and the price you paid for it. It's particularly useful if you've bought the car on finance.

Many people purchase Gap insurance along with their new car, but we found dealerships charging almost four times more than insurers.

We also found inflated prices being charged for cosmetic scratch and dent insurance and alloy wheel and tyre insurance.

The same cover at more than double the price

When buying a new car, negotiation is essential - and is also expected.

But when it comes to extras such as Gap and cosmetic insurance, you're buying a financial product. It's essentially the same insurance, wherever you buy it.

It may be convenient to buy insurance at the dealership, but is that convenience worth £367? That's the mark-up on Gap insurance we were offered for a Ford Fiesta by a Ford dealership.

We also contacted Toyota, Lexus and Honda dealerships and, in all cases, you could save at least 50% by going direct to an insurer. These quotes may not be representative of all dealerships connected to these brands, but it's always worth comparing a dealership quote with quotes from insurers.

Cost of Gap insurance from car dealerships and insurers

High prices for dent and tyre cover

When buying a new car, you may also be offered cosmetic scratch and dent insurance and alloy wheel and tyre insurance.

While dents and dings are covered by traditional comprehensive insurance, the excess you'd have to pay - and the risk of losing your no-claims discount - can make it uneconomical to claim. That's where these extra insurance products step in.

Unfortunately, the mark-up charged by dealerships means cosmetic and wheel and tyre insurance isn't cheap. We compared the quotes from a Ford dealership with the average price charged by seven insurers.

For a Ford Fiesta the dealership quoted us £599 for cosmetic scratch and dent insurance. But the average cost from an insurer was £265 - a £334 saving.

For alloy wheel and tyre insurance for the Ford Fiesta, the dealership quoted us £599, but insurers offered us £441 on average - a £158 saving.

• Find out more: how to buy the best new car

Regulators cracking down on high commissions

We're not alone in noticing how much dealerships are charging.

In April the Financial Conduct Authority (FCA) investigated how insurance is being sold, including Gap and cosmetic scratch and dent insurance.

In particular, the FCA looked at who exactly was making money from a typical Gap insurance premium, for insurance bought at a dealership:

• Distributor (between dealership and insurer)1.67%
• Insurance Premium Tax 16.67%
• Insurer 22.50%
• Car dealership 59.17%

For cosmetic scratch and dent insurance, the FCA found that over half of the premium went to the car dealership, compared with a third to the insurer providing the cover.

The FCA also saw examples of Gap insurance being sold to customers who simply didn't need it, including for second hand vehicles where the 'gap' in insurance payouts was too small to make specialist insurance worthwhile.

The FCA has now warned insurers and dealerships that setting commission at a level that 'bears no reasonable relationship to the benefits or services provided by firms in the distribution chain can indicate that the product value is causing harm to the customer.

• Find out more: the best and worst car insurance