What Exactly Is Credit Shortfall Insurance?

Did you take out Credit Shortfall Insurance when you purchased your vehicles?

It is quite important, especially if your vehicles are still under finance.

WHAT IS CREDIT SHORTFALL INSURANCE?

In short, Credit Shortfall Insurance covers the difference between the Retail Value / Sum Insured of your insurance policy and the Finance Settlement Amount figure of the bank.

The difference between the higher FINANCE SETTLEMENT AMOUNT and the lower RETAIL VALUE is called CREDIT SHORTFALL.

NOTE:

Your insurance policy will only pay current retail value. You would still be responsible to settle the difference with the bank. In other words, you will be responsible for the credit shortfall.

WHY IS THERE A DIFFERENCE ?

Your Insurance Policy

• Your vehicle is insured for current RETAIL VALUE on your insurance policy.

• As you know, the moment your vehicle leaves the dealers floor the Retail Value on the vehicle starts depreciating.

• This depreciation is normally between 7,5% to 15% per annum, depending on a number of factors.

• Effectively this means that even within a very short space of time, your insured value, ie. Retail Value is less than what you paid for it.

Your Finance Contract

• Your Finance Contract includes interest at a certain percentage.

• The moment you sign the contract, interest is added ONTO the purchase price of the vehicle.

• In effect, even if you were to settle the Finance Contract the very next day, the Settlement Figure on the finance would be more than the what you bought the vehicle for.

• As you make your monthly instalments, the settlement figure on the finance contract reduces. HOWEVER… it takes quite a some time before the FINANCE SETTLEMENT AMOUNT reduces enough before it is less than the insured RETAIL VALUE.

Nett Effect

• On the one hand you have interest which is added to the purchase price of the vehicle in terms of the Finance Agreement which gives you the SETTLEMENT AMOUNT.

• (AND ….. the interest is a substantial amount)

• On the other hand you have a Retail Value which keeps reducing / depreciating depending on various market factors.

The difference between the higher finance settlement amount and the lower retail value is called CREDIT SHORTFALL.

NOTE:

Your insurance policy will only pay retail value. You would still be responsible to settle the difference with the bank. In other words, you will be responsible for the CREDIT SHORTFALL.

IS THERE EVER A POINT WHERE THE FINANCE SETTLEMENT AMOUNT AND RETAIL AMOUNT ARE THE SAME?

Yes there is, but this depends on your finance arrangement.

Example :

• If you paid a substantial deposit at the time of purchase, the settlement amount might be less than the Retail Value from the outset of the contract.

• As the finance is paid over the finance term, you are effectively reducing your settlement amount thereon.

• There will therefore arrive some point where the amount owing to the finance house will be less than the current retail value of the vehicle at that point.

HOW LONG DOES IT TAKE BEFORE THE FINANCE SETTLEMENT AMOUNT IS LESS THAN THE RETAIL VALUE?

Once again, this all depends on your Finance Arrangement.

Below are just examples:

• If a 10% deposit was paid and the vehicle financed over 54 months the Settlement Amount should be less than the Retail Value within 12 – 18 months.

• If a vehicle is financed without a deposit but over a 60 month term, without a residual value, typically this point is reached after 18 – 24 months

• If a vehicle is financed with eg. a 40% Residual Value over a 60 month term, the point where the Settlement Amount is less than the Retail Value is only reached after 36-42 months.

The underlying principle is this:

The longer the finance period or the higher the residual percentage, the higher the interest due. The higher the interest, the longer it takes for the SETTLEMENT AMOUNT to be less than the RETAIL VALUE.

CONCLUSION:

What this means is that should your vehicle be written off or stolen during the period that it is still under finance you might face a situation where

your insurance policy pay out will be less than the settlement of the bank.

The fact is you will be liable for this difference (Credit Shortfall) unless you have taken out Credit Shortfall insurance at the time that the vehicle was purchased.

So again the question…

Have you taken out Credit Shortfall Insurance ?

We believe that the risks faced by each business and each individual is unique. We believe in providing each business, and each of our clients with a comprehensive insurance solution that addresses their own unique and individual risks. Contact us today!