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Credit shortfall cover

Shortfall cover, also known as gap cover or top-up cover, bridges the gap between the money you still owe on your car, and the amount your insurer pays out if your car is written off or stolen.

Do I need credit shortfall cover?

You might want to consider credit shortfall cover if you recently bought a car via a loan from the bank and you didn’t manage to put a deposit down on the car. If your car is written off or stolen, depending on your insurer, you will be paid either retail value, market value or trade-in value. This amount could be much lower than what you still owe on your car loan and, of course, less than what you originally bought the car for.

Why would my insurer pay me less than my outstanding loan?

While the outstanding balance on your loan decreases with each monthly repayment you make, the rate at which the value of your car depreciates is often faster than the speed at which your loan balance reduces. This is especially true of brand-new cars where the depreciation is usually the highest early on in the loan repayment. Depending on their make and model, cars can lose as much as a third of their value in their first year, and as much as half their value in the first two years.

Will I need credit shortfall cover for the whole repayment term of my car loan?

Not necessarily. As you pay off your car loan via monthly payments, you will begin to owe less and less. Eventually, the amount you will owe the bank will be less than what value your car is insured for, meaning that there won’t be a shortfall. It’s best to check with your insurer and bank to see when it’s appropriate to drop the shortfall cover.

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