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Is your vehicle shortfall insurance coming up short?

So you think you have vehicle insurance that covers you for any eventuality? You may be in for more than a bumper-bashing when it comes time to claim.

Despite having credit shortfall insurance, you could still find yourself out of pocket when it comes to claiming because you don’t properly understand how vehicle shortfall insurance works. If you’re not sure about what your policy covers, you may be in for a nasty surprise.

What is vehicle credit shortfall?

Vehicle credit shortfall is the difference between your car’s insured value and the amount you still owe to the bank. Let’s say for example, that you financed a car for R350,000, and insured it at retail value. However, a car depreciates in value very quickly, and one or two years down the line it may only be worth half of what you bought it for – say R200,000. You still owe the bank R300,000, so should something happen to your car (stolen, or written-off), the shortfall between the insured amount and what you still owe the bank would be R100,000. 

If you don’t have shortfall insurance, you are liable for the remaining R100,000. Ouch!

Do you have credit shortfall insurance, or do you just think you do?

Many policyholders will purchase credit shortfall insurance as a top-up product to cover this gap. However, you may still find yourself out of pocket when it comes to claiming. But how?

You are possibly misunderstanding how the cover works and its many variations. For example, if you have fallen behind in your car payments, forgotten to insure your vehicle accessories, or even neglected to include the residual (balloon) payment in your cover, your shortfall insurance may not be enough to cover these gaps. Here’s what you need to know:

If you have missed finance payments

Credit shortfall insurance will only cover the financing gap based on the original credit agreement. So, if you have missed any payments or you extended the repayment period, your policy may not cover the full outstanding balance.

If you haven’t insured your vehicle accessories

It is important to know how your car is valued at the time of taking out the comprehensive insurance. If you have paid for additional accessories, such as a tow bar or sunroof, make sure that these accessories are calculated into the value of your car.

Not insuring your residual (balloon)

You need to make sure that your residual or balloon payment is included in the credit shortfall policy agreement. Unfortunately, and because this increases the monthly premium, many people choose cover without residual without understanding the consequences. Don’t be one of them.

Trade or retail?

Another potential and unwelcome surprise could be discovering that your car has been insured for trade value, not its retail value. Trade value is the price you would receive if you sold it to a dealer, and is typically much lower than the retail value that you would pay to replace your car with the same accessories and mileage. 

These are important questions to ask when comparing quotes. Remember, a “bargain” now could be a financial catastrophe later down the line, which could see you going into debt to sort it out. If you are unsure about what type of coverage you have, call your insurer today to make any necessary adjustments to your policy. And if you’re falling into debt because of shortfall cover that came up short, get in touch with our financial advisors to assist you.