If calamity strikes and your car is stolen or written off after an accident, you may have to pay a shortfall on your vehicle finance on a car you no longer have – a shortfall arises when the outstanding loan amount is higher than the value of the vehicle. Vehicle values depreciate over time, and a comprehensive insurance policy only pays out the depreciated value of the vehicle at the time of the loss.

The purpose of credit shortfall insurance is to ensure that you are adequately covered for the difference between the outstanding balance on your finance and your car’s retail value. You would not need shortfall cover when buying cash, or when the value of the vehicle is more than you owe the finance house.

An important aspect to note is that, of the almost 4,500 motor vehicle complaints the Ombudsman for Short-Term Insurance (OSTI) office dealt with in 2019, the main issue was disputes related to credit shortfall and uninsured accessories.

According to the ombud’s CEO, Edite Teixeira-Mckinon, consumers should be made aware of exclusions in the small print of the credit shortfall policy. Teixeira-Mckinon told TimesLIVE that what is often not disclosed at the time the insurance is sold, often on a dealership floor by the resident finance and insurance person, is that the policy does not cover interest, balloon payments or uninsured accessories on the car, such as roof racks, tow bars and canopies. “In other words, the way the credit shortfall policy is structured does not coincide with the way the finance agreement is structured,” she says.

What this means for the insured is that, even after a pay-out from a comprehensive policy on the vehicle, and the shortfall cover pay-out, he/she may still owe a large sum to the financial institution and therefore cannot afford to finance a new car. “In many cases these terms and conditions are not explained to the consumer, and if we can establish that, we find in their favour. It is not enough for the insurer to send the policy document to the consumer later. They are obliged to highlight the critical terms and conditions of the shortfall cover, and get the consumer to initial them,” Teixeira-Mckinon says.

In order to ensure that they are sufficiently covered for all eventualities, consumers are advised to insure any accessory that does not come standard with a vehicle, and to interrogate the terms and conditions of a policy before signing.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.