CAR BUYERS who choose to cut monthly costs by financing with residual (balloon) payments run the risk of owing creditors much more than what insurance companies will pay out if the vehicle needs to be replaced.

Tempting balloon payment deals require a lump sum to be paid at the end of the finance term, and if your car is written off or stolen in that term, it’s possible that you’ll be left with a substantial debt after an insurance payout.

Basically, you’ll be paying for a car you no longer drive!

Short-term insurance provider Santam offers a credit shortfall insurance to cover the gap between the insured value and the debt you owe on the vehicle.

Santam’s Marius Neethling says, “A car isn’t just a valuable personal asset, it is often a person’s pride and joy. The thought of downgrading to a smaller model or doing without a car can be devastating – but this is exactly what might happen if the car’s finance is not fully covered by insurance.”

He said that, typically, people insure their car for market value. “But if the car is written off or stolen and the car has a balloon payment attached, it is possible that they’ll owe the bank thousands more than the value of the car. This means that they’ll need to pay off a sizeable chunk of cash to clear their debt. Without shortfall insurance, the financial impact can be devastating. You are expected to pay the outstanding debt off immediately. This potentially means taking out a short-term loan and replacing your car with a cheaper model or going without a car altogether.”

Neethling says credit shortfall insurance is relatively inexpensive and it covers the gap between the outstanding debt and the market value of the car. The credit shortfall cover only applies to vehicles which are comprehensively insured – it is not available on vehicles that are partly insured, for example if they are covered just for third party insurance, fire and theft.

If your car is insured for less than the market value, the amount covered will apply to the gap between the debt and the market value and not to the insured value. Any installments and interest not fully paid up will be deducted from this amount. The cover generally will not cover extra expenses associated with the car finance, such as the deposit or the excess on your insurance policy.

© Copyright 2016 Independent Newspapers (Pty) Ltd, source Newspapers

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