What is a balloon payment? And how to protect yourself with shortfall insurance

What is a balloon payment? And how to protect yourself with shortfall insurance

What is a balloon payment? It’s a lumpsum payment required at the end of a loan, in this case, when you’re paying off your vehicle. Why is it a problem? Well, imagine, you’ve purchased the luxury car of your dreams when you are involved in a prang. Nobody is seriously hurt but the damage to your car is significant and it will have to be written off. Since you’ve insured it for its market value - which most people do – you’ll still end up owing the bank quite a lot of money which you don’t really have, and if there’s a balloon payment at the end, it’s even worse.

Luckily, with the right knowledge you can make a decision about whether or not you opt for a balloon payment and, regardless, there is cover to help financially protect you in this situation. Whether your car is stolen or written off after an accident, top-up cover or credit shortfall insurance could help you if you’re in a financial bind.

What is shortfall cover car insurance?

This type of cover is usually offered as an optional add-on when you take out insurance for your car and most insurers or finance companies offer it as part of their vehicle cover.

Vehicle financing usually entails high financing charges, most of which comprise the interest on your loan over the repayment period. Therefore, it is very important to understand what type of vehicle finance you have and whether the insurance available to you, covers exactly that.

If your car is insured for less than its market value the shortfall cover applies to the market value and not to the insured amount.  For example, if your car is insured for R 100 000, the market value of the car is R 110 000 at the time of the accident and the outstanding settlement value is R 130 000, we will pay the difference between the value of the vehicle and the outstanding settlement value of R 20 000.  For a slightly higher premium, Santam will also cover your residual (balloon) payment. You can use our insurance for your car calculator to help you determine costs, or speak to one of our brokers.

When does shortfall cover pay out?

The conditions under which shortfall cover pays out do not differ much among insurers. Santam will pay this difference if it accepts a claim for the vehicle being either beyond economic repair following loss or damage or stolen and not recovered within a reasonable period. 

Reasons to insure with Santam

Santam is South Africa’s largest short-term insurer, insuring risks of over R4 trillion. We also offer the following cover and benefits: 

  • Comprehensive car insurance now comes with a guarantee. Guaranteed value insurance: cover that makes things right if your car is written off or stolen (Ts and Cs apply).
  • Six free SOS servicesto all personal lines clients.

What is a balloon payment? Essentially, it’s a lumpsum that could put you in financial jeopardy. Get shortfall insurance to help cover the outstanding finance on your car in the event of an incident or write-off and visit our car advice page for more useful tips.

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