Avoid Paying for a Car You No Longer Have: Why You Need Credit Shortfall (Gap) Insurance

When you drive off the dealership floor in your new car, it’s one of the best feelings, but did you know that the moment your wheels hit the road, your car starts losing value?

If something unexpected happens, like an accident or theft your insurer will pay out the current value of your car, not the amount you originally paid for it. That’s where credit shortfall insurance, also known as gap cover, becomes a financial lifesaver.

What Exactly Is Credit Shortfall Insurance?

Credit shortfall insurance covers the difference between what your insurer pays and what you still owe the bank on your vehicle finance account if your car is stolen or written off.

Let’s say you bought your car for R400,000, and a year later, you still owe R350,000 on your finance agreement. But by that time, your car’s retail value has dropped to R300,000.If your insurer pays R300,000 after a total loss, you’d still owe the bank R50,000, for a car you no longer have.

Credit shortfall insurance covers that R50,000, saving you from a serious financial setback.

Why It’s Worth Having

Here’s what makes credit shortfall insurance one of the smartest add-ons to your car insurance:

Protects You from Debt – You won’t be stuck paying off a car that’s been stolen or written off.

Keeps Your Credit Record Clean – Your bank is fully paid out, protecting your credit score.

Affordable Premiums – The monthly cost is minimal compared to what you could lose.

Peace of Mind – You can drive knowing you’re covered for the unexpected.

When Does Credit Shortfall Insurance Apply?

This cover is especially important if:

• You’ve financed your car through a bank or dealership.

• You’ve chosen a balloon payment or residual value finance deal.

• You own a new or high-value vehicle that depreciates quickly.

• If your car is stolen, hijacked, or written off after an accident, your comprehensive vehicle insurance will pay its market or retail value.If that amount is less than your outstanding finance, credit shortfall insurance bridges the gap.

Why a Shortfall Happens

Shortfalls occur for a few common reasons:

• Depreciation: Cars lose value faster than you repay your loan.

• Loan Terms: Balloon or residual payments increase the shortfall risk.

• Early Settlement Fees: Some finance houses charge fees when a loan is paid off early after a claim.

Without the right cover, you’ll need to settle this difference out of your own pocket.

Did You Know?

Credit shortfall insurance is optional in South Africa. Under the Short-term Insurance Act and FAIS regulations, insurers and brokers must make sure you understand what you’re buying and that the product suits your financial needs.

So, if you were ever told it’s “mandatory”, it’s not. But it’s certainly worth having if your car is financed.

If your car is financed, credit shortfall insurance is a small price to pay for big peace of mind. It ensures that if your car is written off or stolen, your loan is settled in full, leaving you free to move forward without financial stress.