Your Car Is Written Off — So Why Do You Still Owe the Bank?
Most South Africans assume that if their financed car is stolen or written off, their insurance payout will settle whatever is still owed to the bank.
Unfortunately, that is not always the case.
Many motorists only discover after a claim has been paid that they still owe thousands, or even tens of thousands of rand, to their finance provider.
The reason is simple: the insurer and the bank are looking at two different numbers.
The insurer pays an approved claim for a stolen or written-off car based on what the policy says the car was worth just before it was lost. The bank looks at how much is still outstanding on your car loan.
If those amounts do not match, you can be left owing the difference. This is known as a finance gap or credit shortfall.
This risk is often greater than many motorists realise, particularly where the vehicle was financed with:
- a small or no deposit;
- a long repayment term;
- a balloon payment; or
- a combination of all three.
Why a finance gap develops
Cars generally depreciate over time as they age and accumulate kilometres.
Vehicle finance, however, does not always reduce at the same pace.
The amount still owed to the bank depends on factors such as:
- the loan term;
- the interest rate;
- the deposit paid upfront;
- the monthly instalment; and
- whether a balloon payment forms part of the agreement.
As a result, a driver can find themselves owing more on the vehicle than the insurer pays following a total-loss claim.
This is especially common during the early years of a finance agreement when a large portion of the debt remains outstanding.
A balloon payment can leave more debt outstanding
A balloon payment is a lump sum that becomes payable at the end of a vehicle-finance agreement. The main attraction is that it reduces monthly instalments, making a vehicle appear more affordable.
However, the outstanding balloon amount does not disappear if the car is stolen or written off before the loan reaches maturity.
In practical terms, this means a customer can be left with a larger outstanding balance than expected when a claim occurs.
WesBank gives an illustrative example of a R350,000 car financed over 60 months at 11.5% interest. With no balloon, the monthly instalment is about R7,700. With a 20% balloon, it falls to about R6,830 a month — but R70,000 is still due at the end, and the total amount repaid is higher.
Standard Bank has also previously told BusinessTech that a third of its car-finance customers had selected the maximum balloon payment available during the preceding year, while new-car purchases using balloon payments had increased 41% over five years.
That remaining debt can contribute materially to a finance shortfall if the vehicle is lost before the finance agreement ends.
When the numbers don’t add up
Consider the following example.
A driver purchases a vehicle for R420,000 using a small deposit and a balloon payment.
Two years later, the vehicle is stolen.
The insurer approves the claim and determines the settlement value to be R310,000.
However, because a substantial finance balance remains outstanding, the driver still owes the bank R360,000.
The numbers look like this:
Outstanding finance balance: R360,000
Insurance settlement: R310,000
Finance shortfall: R50,000
R360,000 – R310,000 = R50,000 still owed to the bank
Even though the car is gone and the insurance claim has been paid, the customer remains liable for the outstanding R50,000.
For many households, finding that amount at short notice can create significant financial pressure.
Where Credit Shortfall Cover can help
This is precisely the situation Credit Shortfall Protection is designed to address.
Credit shortfall cover helps when the insurance payout for a stolen or written-off car is less than what you still owe on the car loan. It pays an additional amount towards that difference, up to a set limit.
Prime South Africa offers Credit Shortfall Protection as an optional benefit on its Comprehensive and Customised car insurance products. The benefit can provide up to 20% of your car’s current sum insured — the value shown on your policy — towards a qualifying shortfall, provided the applicable policy terms are met.
Using the example above:
Outstanding finance balance: R360,000
Insurance settlement: R310,000
Qualifying shortfall: R50,000
If the available Credit Shortfall Protection limit is sufficient to cover the entire qualifying shortfall, the benefit could contribute the full R50,000 towards settling the remaining finance balance, subject to policy terms and limits.
If the shortfall is higher than the benefit limit, the customer remains responsible for the difference.
The benefit also does not cover:
- balloon or residual amounts;
- a shortfall created by the insurance excess; or
- administrative costs associated with settling the credit agreement.
The important question is therefore not only whether you have Credit Shortfall Protection, but how much of a potential finance gap it could cover and what you may still need to pay yourself.
If you are financing your car and want to see how Prime Comprehensive cover and optional Credit Shortfall Protection could help, you can get a Prime car insurance quote online and compare it with the cover you have now.
Get a Prime car insurance quote
Two numbers every financed-car owner should know
Many motorists carefully track their monthly instalment but rarely compare their outstanding finance balance with the value used for insurance purposes.
Understanding both numbers can help reveal whether a potential finance gap exists.
Before renewing your cover or signing a new vehicle-finance agreement, it may be worth asking:
If my car is stolen or written off tomorrow, would the insurance settlement fully clear what I still owe the bank?
If the answer is no, Credit Shortfall Protection could provide valuable additional protection against an unexpected financial burden.
To see how Prime Comprehensive Cover and optional Credit Shortfall Protection could help, get a Prime car insurance quote online and compare it to your current cover.
Review your cover with a Prime quote
Disclaimer
This article provides general information about car finance, car insurance and credit shortfall cover in South Africa. Finance balances, insured values and claim settlements depend on individual finance agreements, policy terms and claim circumstances.
Terms and conditions apply. Insurance benefits are underwritten by Santam Structured Insurance Ltd, a licensed non-life insurer and authorised FSP 1027. Prime South Africa is an authorised FSP 41040.
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