The end-of-year holidays are popular times for car buyers to upgrade their set of wheels, whether it’s to impress visiting family or to enjoy a long road trip in comfort. If you’ve bought a car before, you’ll know that vehicle financing can be somewhat complicated, with dealerships offering all sorts of financing structures, such as the balloon payment option, to seal the deal.
New cars are great but it’s important to know how you’ll continue to pay your car installments should it be stolen or written off. Especially if you’ve bought a new car, remember that its value will drop substantially the moment you drive it out the showroom door. Sadly, just because a car is worth less doesn’t mean there will be a drop in the amount you owe the bank. This is where credit shortfall cover or “gap cover” comes into play.
What is credit shortfall car insurance?
Credit shortfall insurance is sometimes also called top-up or gap insurance. It exists to cover the difference between your vehicle’s retail value (usually the amount the car is insured for) and how much you paid for it when you bought it, i.e. the amount you owe on your loan.
Here is a practical example of where credit shortfall cover would be a lifesaver:
Say you bought your vehicle for R150 000 and you’ve paid R20 000 off on your financing loan. It gets written off in an accident and your insurer only pays out R100 000 (its current retail value). You still owe R130 000 on the vehicle so that means a shortfall of R30 000. If you had taken out credit shortfall insurance, that R30 000 shortfall would be paid out to the financial institution to settle your outstanding amount - so you’re not left having to pay R30 000 when you didn’t expect it.
What is included in this car cover, and what’s not?
Credit shortfall insurance will cover you for any shortfall between the amount you owe on your financing loan and what you are paid out (if a car is deemed beyond economic repair following an accident or if stolen). You will always be personally responsible for any additional money due, such as the excess payment, any charges if your vehicle installments were in arrears or other additional financing charges.
How do I know if I’ll need credit shortfall insurance?
Here’s a checklist to know if credit shortfall cover is for you:
- Are you financing your car? Then it’s a good idea to add this optional extra to your policy. The last thing you want is to have to keep paying off a car that you don’t own any more.
- Are you buying a brand-new car? Then its value will depreciate 15-20% in the first year, and approximately 50% after you’ve owned it for 5 years*. Therefore you’re guaranteed to face a value gap if your car is deemed beyond economic repair following an accident or if the car is stolen.
- Can you afford the shortfall yourself? If you have some money stashed away in the event your car is stolen or written off, then you can always make up the shortfall yourself. However, this is not the case for most people who are saving money for other expenses.
Get comprehensive car insurance from Santam
Santam is South Africa’s largest short-term insurer and you can choose to add on guaranteed value insurance – gap cover that makes things right if your car is written off or stolen (Ts and Cs apply). Personal lines clients also get free SOS services. Make sure you’re covered, with Santam, today.