You may owe a certain amount on your financed vehicle but this does not mean that your car insurance cover will settle the outstanding balance in full if the vehicle is written off, stolen or lost through some other means.
Car insurance, and comprehensive cover in particular, is one of the best ways to financially protect yourself against damage or loss of your vehicle. It is mandatory for financed vehicles but this does not mean that car insurance will protect your completely when it comes to outstanding loans. Without top up cover, the insurance payout may be insufficient to settle the outstanding loan value if the car is stolen, hijacked or written off in an accident.
Click here for car insurance quote
Replacement Value and Book Value is Not Loan Value
Many car owners do not realise that the loan value is not the same as the replacement or book value. Car insurers will payout according to the book value or replacement value. This is essentially what the car is worth or what it will sell for in the market at that point in time. These values are usually lower than the loan value, particularly in the first 2 to 3 years of a 5 year loan repayment period.
This is largely due to interest which consumes most of your instalment in the first few years of the loan repayment. Remember that in the event of the loss of your vehicle, the amount paid by the car insurer is not your money but the lender’s until the entire loan is settled in full. You will be held liable for the shortfall between what your car insurance pays and what is still owed to the bank or other lender.
How does top up cover work?
Top up car cover protects you against the shortfall in the car insurance payout and outstanding loan value. It s not mandatory, unlike with comprehensive car insurance for financed vehicles. However, it should considered as an essential add-on, whether it is being offered by the insurer, a third party financial service provider or by the lender financing your vehicle.
For example, you bought a car just over 1 year ago and financed it for an amount of R100,000. So far you have paid monthly instalments of R2,000 but still owe R85,000 to the bank. Remember that there is interest to pay on the loan value so your entire instalment does not only pay towards the principal amount.
Your car is stolen and not recovered but the insurer determines that the replacement value for a 1 year old used car of your make and model is only R75,000. Even if the insurer pays the bank the R75,000, there is still an outstanding R10,000 that you have to settle.
This is simply an example to illustrate how comprehensive car insurance will not cover the full outstanding value of your finance agreement. In the example above, the top up cover will pay the R10,000. It is in situations like these that top up car cover will work in your favour. The top up cover will pay the difference from what your car insurance will settle and what is still outstanding on the loan amount. It ensures that you are not out of pocket for the difference.
Budget for Top Up Cover
The monthly cost of top up car cover, also known as vehicle gap cover, varies depending on the value of the vehicle and loan amount in question. It usually costs a few hundred rand and is a factor to consider when you are buying a car that you will have to finance. Remember that comprehensive car insurance is mandatory for any vehicle under finance. Top up cover will cost you above and beyond the comprehensive car insurance cover.
Many consumers do not factor in the cost of comprehensive car insurance when considering a vehicle finance instalment that they can afford. This ultimately leads to financial strain and the risk of losing the vehicle altogether. Should the vehicle be written off or stolen, there is additional financial pressure in settling any shortfalls between the insurance payout and the loan value.
Always shop around for top up cover as you would when you compare car insurance quotes. The lender may offer you top up cover as an additional extra when you are signing the finance agreement. However, this is not always the most competitive rate for top up car cover. You could end up paying substantially more for this cover than you would need to by accepting the first quote on offer.
While top up car insurance cover may not be mandatory, it just makes financial sense to include it for at least the first 2 to 3 years of your finance period. You can discontinue the top up cover once the replacement or book value is equal to or exceeds the outstanding loan value. Rather avoid the financial implications of having to pay for a shortfall from your own pocket, which can ultimately affect your ability to replace your lost vehicle.