Credit shortfall insurance is also known as top-up or gap insurance. The main reason why we have shortfall insurance is, should your car be written off in an accident or be stolen, to cover the difference between your vehicle’s retail value, the amount your car insurance will pay out for your car, and the original amount you bought it for (the amount you still owe on your financial loan). For a small additional fee each month, you can add shortfall cover to your comprehensive insurance policy which will ensure that you are not left with any financial burdens if an incident occurs.
Car insurance is insurance for any kind of road vehicle, being cars, trucks and motorcycles. Consumers take out car insurance to protect themselves against any physical damage or human injury as a result of an accident or having your car stolen. When a person takes out car insurance, the first thing to understand is that should an accident happen, your insurance policy will only cover the amount that the car is worth (the retail value) at the time of the accident. The moment you drive your car out of the showroom, it immediately depreciates in value, meaning that your car is not worth what you initially paid for it. So what happens if you get into an accident or have your car stolen and your insurance does not pay out the full amount that you bought the car for? This is where shortfall insurance comes in. It will not pay out as much as car insurance, but their primary purpose is to pay for the financial gap that is not covered by the insurance company. Thus, shortfall insurance almost acts as the bridge between what the car insurance company will pay out and the leftover amount that still needs to be paid.
If you’ve bought your vehicle with any kind of financing support, it’s recommended to take out credit shortfall insurance. If you are not in a financial position to put down a large cash deposit, then taking out shortfall insurance would be a wise decision.
If you are about to buy a new or second-hand car and are planning to finance it through a bank or another financial institution, then it is definitely worth considering shortfall cover. South Africa has high crime and accident rate which means there is a possibility that you could get into an accident or have your car stolen. It makes sense to be covered for these unforeseen events rather than setting yourself up for financial failure and paying or a car that is no longer in your possession.
For example, you decide to buy your dream car for R150 000 and take out a loan to help make that dream come true. After a few months of having your car, you have already paid the financer R30 000 which means you still owe your financer R120 000. In the event of an accident, say your insurer will only cover R100 000, which means that you are left with a R20 000 credit shortfall. This is where shortfall insurance comes in and covers that ‘gap’.