What is Shortfall Cover in Car Insurance?

Picture this: there you are, happily driving along Winnie Mandela Drive, when an accident literally throws you off your course. You survive, of course—it’s not that kind of story—but your car is a write-off (insurance talk for badly damaged).

Adding insult to injury, your insurance payout is R150,000. Which would be fine, except you owe the bank R200,000 for your car loan!

The R50,000 difference is what is considered a credit shortfall.

This Pineapple guide will explain shortfall cover, how it works, and why it’s a must for South African motorists whose vehicles are financed.

TL;DR – Our version of “I’m not reading all that, *SparkNotes pls.”

• Cars often depreciate faster than motorists are able to settle their finance loans. This creates a gap where you might still owe the bank after an insurance payout.
• Shortfall cover bridges the financial gap between your car’s insured value (typically the retail value) and your outstanding car loan if your vehicle is stolen or written off.
• It’s especially crucial for car owners with a balloon payment, as not all standard car insurance policies include this final lump sum.
• Pineapple’s comprehensive car insurance offers credit shortfall as an optional add-on. This added protection provides crucial protection and peace of mind.

Understanding Shortfall Cover

Shortfall cover, sometimes called credit shortfall, is a specialised type of insurance coverage designed to bridge the gap between your vehicle’s retail value (what insurers typically cover your car for) and the outstanding balance on your car’s loan.

With most South African motorists turning to financing to fund their car ownership dreams, shortfall is becoming a growing concern. 

If your car is stolen or written off, your standard comprehensive car insurance typically pays out the retail value (or the insured value) of the vehicle at the time of the loss, which may be less than your outstanding loan balance. 

The issue is that this retail value typically depreciates faster than the car’s loan balance reduces. This creates a gap (Get it? Gap insurance) where you’ll owe the bank or finance house more than what the vehicle is worth, or rather, what your insurance is willing to pay out for it.

So, shortfall cover helps you manage the remaining debt to your finance provider, so you’re not left paying out of pocket and without a car.

How Shortfall Cover Works with Car Insurance

Shortfall cover typically kicks in only if your insurance declares the vehicle a total write-off, e.g., it’s stolen and not recovered or damaged beyond repair. 

Sadly, it doesn’t cover minor repairs; that’s between you and your insurance.

Most short-term comprehensive vehicle insurance policies offer shortfall vehicle protection as an optional extra. However, shortfall coverage can also be purchased as a standalone through a finance house or any VAPS (Value Added Products Service provider). 

While shortfall cover is generally a heaven-sent, it does have its limitations, namely:

• If you haven’t included shortfall cover in your policy before a write-off.
• Shortfall cover won’t pay out if you’ve missed your monthly car insurance premium.
• If your overall comprehensive car insurance claim is rejected (e.g. due to fraud, an unroadworthy vehicle, etc.).
• Any extras or accessories not included in your underlying comprehensive insurance policy.
• Negative equity from prior financing (e.g., if your loan includes debt rolled over from a previous vehicle), as some policies may exclude this (please check your policy for details).

After a car write-off, the shortfall amount is paid directly to your finance house, compensating you for the loss. This means your debts are handled on your behalf, and the temptation to be the latest case on I Blew It is lifted.

Balloon Payments & Shortfall: What You Need to Know

A balloon payment, also known as a residual payment, is a large lump-sum payment due at the end of a car loan term, typically when a portion of the loan is deferred to lower the monthly instalments. This final payment can be significant and is often a percentage of the car’s original price.

Motorists favour a balloon payment because it allows them to defer a portion of the car’s cost, making the monthly instalments more financially manageable.

But the question remains, “Does shortfall cover balloon payments?”

Shortfall cover is not a standard offering with most comprehensive insurance policies. 

Instead, it’s an optional extra that can include the balloon payment, helping you with the financial responsibility of that sizeable debt after a car write-off. 

Do You Really Need Shortfall Cover?

If you’re still on the fence about adding shortfall to your car insurance policy, we get: those Spotify and Netflix subscriptions are already draining your budget. 

But, when it comes to shortfall protection, it’s not a question of “Do I really need shortfall cover?” but rather, “Can I afford not to have it?” The financial risk is not something to take lightly, especially for many South Africans who can barely put away savings.

Here are just a few scenarios where shortfall cover can come in clutch (“can be useful”, for all the boomers and millennials in the back):

1. Depending on the make, model, and market conditions, new cars lose 15-20% of their value* in the first year alone! This means your vehicle’s value can drop faster than the rate you can pay off your loan, creating an immediate gap.
2. High interest rates mean paying off the loan much slower, keeping the outstanding amount higher for longer.
3. As mentioned, shortfall cover can be helpful for cars financed under the balloon payment method, helping manage the intentional deferral of a large chunk of debt to the end.

So, who exactly needs shortfall cover?

• New financed vehicle owners,
• Second-hand car buyers (more on this in the next section),
• Anyone with a car loan where the repayment outpaces the depreciation,

Basically, anyone who wants peace of mind and to avoid unexpected debt.

Is Shortfall Worth It for Second-Hand Vehicles?

We asked Pineapple’s Training Facilitator, Ishmael Hlapolosa, if shortfall cover was worth it for second-hand cars. He said, “It doesn’t really matter if the vehicle is second-hand or new, as long as the car is financed, a shortfall is needed.”

There’s no denying that new cars take the biggest hit in terms of depreciation. But, second-hand vehicles also depreciate, particularly as they age, accumulate mileage, or develop wear and tear, which can increase the risk of a gap between the outstanding loan and the insured value.

Plus, you may be financing an older vehicle over a short period, yet the outstanding loan balance could be higher than the retail value. This is especially true if you bought it at the higher end of its retail value.

Lastly, a used car might have existing wear and tear or a less predictable depreciation curve. This increases the risk of the vehicle being declared a total write-off with a significant outstanding loan amount.

Don’t let the second-hand label fool you, having a gap in insurance coverage can be just as financially crippling as for a new car—not only will you not have a car, you’ll owe the bank thousands of rands. 

Pineapple’s Take on Shortfall Cover

Every Pineapple vehicle insurance policy has a shortfall cover option, seamlessly adding an extra layer of security without the hassle. We aim for your comprehensive car insurance to account for your outstanding loan balance, ensuring complete financial protection.

Adding shortfall protection to your policy is as simple as a few taps in the Pineapple app, instantly giving you extra peace of mind. 

If you’re on a call with one of our friendly Pineapple agents, ask them to add it to your policy while generating your quote. 

Are you worried about how that will affect your final premium price? No need.

Like all our insurance products, Pineapple provides transparent pricing for shortfall cover. Premiums are clearly displayed during the quote process, so you know exactly what you’re paying for!

Mind the gap by including Pineapple’s shortfall cover in your comprehensive cover.

Frequently Asked Questions: Shortfall Car Coverage

1. What is Shortfall?
   Shortfall cover is an optional add-on to car insurance policies that pays the difference between your insurance payout and your outstanding loan balance if your car is stolen or written off. For example, your car is insured for its retail value of R200,000, but the loan amount is R250,000. If your vehicle is written off after an accident, the insurance payout will only be R200,000, leaving you still owing R50,000.
2. Does the shortfall cover balloon payments?
   Pineapple’s shortfall coverage does not directly cover the balloon payment itself. Pineapple’s shortfall calculation is based on what you would have owed if you financed the car without a balloon payment. So, if your vehicle is written off or stolen and not recovered, you’ll be responsible for this amount, even after the shortfall insurance payout.
3. Why is shortfall needed?
   Shortfall cover helps prevent a bad situation from getting worse. This optional extra allows you to avoid paying out of pocket for an accident after your insurance pays for a stolen or written-off vehicle. Simply put, drivers need shortfall cover to bridge the gap between your vehicle’s insured retail value and the outstanding balance you owe to your finance house.
4. What is an example of shortfall?
   Say you’ve bought and financed a Hyundai Grand i10 for R259,950. Your insurance covers the car based on its retail value at the time, which is determined to be R200,000. If your car is hijacked and not recovered, or you’re involved in a collision which leaves the vehicle beyond repair, the insurance payout you’ll receive will be the insured value at the time (R200,000). But, this is lower than what you bought the car for, meaning you still owe R59,950 to the bank.
5. How does shortfall affect my claims?
   Shortfall cover cannot be added during an active claim and does not affect the processing of your comprehensive insurance claim. If your claim is approved, shortfall cover will bridge the gap between the insurance payout and your outstanding loan balance, typically paid directly to the finance provider.
6. What is the meaning of shortfall in claim status?
   Once your claim is processed, the shortfall is considered when addressing the outstanding loan balance that your comprehensive cover may not cover. This would be the financial gap between what you owe the bank and the car’s insured value.

Final Thoughts on Shortfall Cover

Pineapple’s mission is to empower you to make smarter insurance choices. Did it work? Whether you’ve got a brand spanking new ride or a trusty second-hand vehicle, the risk of an insurance gap is real, especially if it’s financed.

Shortfall cover isn’t another unnecessary add-on that insurers are trying to upsell you. It’s an essential safety net that helps protect you from an unexpected event or debt. 

So, don’t leave your car’s safety up to chance. Add shortfall cover to your comprehensive cover today!

Resources

• Car Write-Offs – An Insurance Guide
• Do You Need Insurance Before Driving Your New Car Off the Dealership Lot?
• Car Financing in South Africa: Loans, Balloon Payments & Tax Benefits

Please Note: The information provided above is for informational purposes only; you should not construe any such information as legal or financial advice.

Pineapple (FSP 48650) is underwritten by Old Mutual Alternative Risk Transfer Insure Limited, a licensed Non-Life Insurer and authorised FSP. T&Cs apply.