We all hope that nothing bad happens to our car. Whether it's a crash, a hit and run, a write-off, or whether it has been stolen. Each scenario is one no one wants to experience. But when it does happen, a common misconception is that your comprehensive vehicle insurance will cover the full cost of the car.
Unfortunately, if your car is stolen or written off in an accident while you’re in the process of paying off a loan for it - your insurance payout is unlikely going to cover the money that you owe to the bank. Leaving you in debt and without a vehicle.
This is the importance of Shortfall Insurance. In this guide, we’ll talk about what shortfall insurance is, when you're most at risk of having a shortfall in your insurance payout, what shortfall insurance provides, its typical cost, and whether you actually need it.
What is Shortfall Insurance?
Shortfall insurance is a little bit of insurance that you can add to your comprehensive car insurance to guarantee you will be protected from having to pay the difference out of your own pocket.
When you make a claim for the total loss of your car, shortfall insurance will bridge the gap between the money you still owe the bank and the amount of money your insurer pays out.
The money paid out by your insurer will be based on the current value of your car. This mount is often lower than what you still owe on your loan for a number of reasons:
- Some dealerships, banks and lenders often add in some future interest at the start of a loan term.
- Dealerships, banks and lenders often include origination and admin fees to the loan.
- Depreciation due to a car losing most of its value early in the loan period.
Depreciation is the biggest reason for a shortfall between what your insurer pays you and what you owe a bank or lender. While the outstanding balance of the loan may decrease each month, the amount you owe can still be significantly higher than the value of your car. Depending on your car’s make and model, it can lose up to a third of its value in the first year, and almost half its value after two years.
Why do I need Shortfall Insurance?
The importance of shortfall insurance is that it can help put you back in a position where you can replace your car. Firstly, as discussed above, it protects you against depreciation to make sure you are not going to be left paying for a car you no longer have. Secondly, it provides financial security by protecting your money if your car is stolen or written off. Thirdly, some banks and lenders may require shortfall insurance as part of their agreement. And finally, shortfall insurance ensures you won’t need to pay out of pocket for your car's cash value and the remaining loan balance.
How much do I pay for Shortfall Insurance?
The cost of your shortfall insurance will vary widely based on a number of factors:
- Vehicle type and value.
- Loan or lease terms.
- Comprehensive vehicle insurance coverage level.
- Where you live.
- Where you purchase it from.
To reduce the cost of your shortfall insurance, shop around and compare quotes from various insurance providers as prices can vary greatly across the market. By adding shortfall insurance to your existing comprehensive vehicle insurance policy, you can also often save costs than if you were to purchase it separately or through a dealership. When taking out a vehicle loan, consider the terms and amount of the loan - often shorter loan terms with larger down payments can significantly reduce the need for shortfall insurance.
How do I know if I need shortfall Insurance or not?
To determine if you need shortfall insurance or not, consider the below points. Generally if your loan matches one or more of the below points, it may be a good idea to explore shortfall insurance.
- You have a balloon payment at the end of your loan.
- You have a no-deposit loan, or your deposit was less than 20%.
- Your loan term is five years or longer.
- You bought a brand new car.
- You have a high interest rate on your loan.
- You’re in the first 2 years of your car loan.
Want to Talk to an Expert About Shortfall Insurance? Jade Finance provides advice, assistance and support to our customers across a range of insurance issues.
As with all financial decisions, you should carefully consider all aspects of shortfall insurance closely to ensure you fully understand this specialty insurance product. For more information on shortfall insurance, call one of our highly trained and experienced finance consultants or connect with us online.
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