The worst has happened. You’re involved in a car accident. Thankfully, you’re not injured. Your car, however, has seen better days.
If the damage to your car is too extensive for repairs to be economical, your insurance company will declare your car a “write-off.” This means that instead of paying for your car to be repaired, your insurer will compensate you for the current retail value of your car. While you may think that this is all good news, your current retail value is most likely lower than what you still owe the bank on your vehicle finance. This leaves you with an outstanding balance still owed on your finance contract – and this is called a shortfall.
Understanding what happens when your car gets written off can be a confusing process, especially when dealing with things like credit shortfalls. This article explains what happens when your car is written off, and how you can protect your wallet from shortfalls.
When does a car get written off?
When you’re involved in an accident, and your car is damaged to the point where it doesn’t make financial sense to repair it, your car may be declared as a “write-off.” The decision lies with your insurance company. If your car is in an accident, or is stolen, or hi-jacked, your insurer will examine your car and look at two key factors to determine if it should be written off:
The cost to repair your car
This involves a detailed estimate for getting your car back to a safe and roadworthy condition. The assessor will consider parts availability, labour costs, and the complexity of the repairs required.
Your car’s insured value
This refers to the current retail value of your car. The assessors will also consider factors like your car’s age, mileage, and overall condition before the damage.
If the estimated repair cost is higher than the car’s insured value, that’s when your insurance company may declare it a write-off.
What happens after your car is written off?
The process after a write-off can differ slightly, depending on whether your car was financed or fully paid off.
A financed car
If your car was financed, and you still owed money on your car, your insurance company will pay out the retail value to your finance house. There may, however, be a “shortfall” if the car’s value was less than the remaining loan amount. If this is the case, and you don’t have Shortfall Insurance, you will be responsible for paying this difference.
Why would there be a shortfall?
Vehicles depreciate over time, this means that over time your car retail value decreases. Your finance agreement, however, doesn’t decrease in value. You are still liable to repay the original loan amount, despite the fact that your vehicle has depreciated.
The other major factor is that when you buy a car there are additional expenses added to the finance agreement such as admin fees, accessories, licensing, and value-added insurance products (VAPs). This means that even from the day you drive your car off the showroom floor, the amount you owe the bank is more than what your Comprehensive Insurance covers.
A paid-off car
If your car was fully paid off, the process is generally more straightforward. You’ll need to submit a claim to your insurance company, following their specific procedures. This may involve documentation related to the accident. Upon approval, your insurer will then process your claim and pay you directly into your bank account.
What happens to a car once it is written off?
Once your insurer has settled your claim, ownership of the written-off car will be transferred to your insurer. You’ll need to sign the necessary paperwork to complete the transfer of ownership. The insurance company may then auction the car, sell it for parts, or dispose of the car if it is too badly damaged.
How to protect your wallet from shortfalls
Having your car written off can be a stressful process. In most cases, if your car is written off, or stolen, your insurance pay-out will not likely cover what you still owe your finance house. This will leave you in a tricky financial situation, and without a car. Luckily, there is an additional layer of protection you can consider: Shortfall Insurance.
Shortfall Insurance is an essential addition when purchasing a financed car. Shortfall Insurance acts as a safety net, covering the difference between your car’s settlement value and the amount you owe to your finance house.
For example, you took out a loan of R300,000 to buy your car, and you’ve paid only R20,000 off. You are in an accident and your vehicle gets written off. Your insurer then only pays out your vehicle’s current retail value, which is R250,000. You still, however, owe R280,000 to your finance house, which means you have a shortfall of R30,000. If you had taken out Shortfall Insurance, you won’t be left searching for an extra R30,000 you don’t have.
With Shortfall Insurance from Bidvest Insurance, you won’t be left with a large debt to pay and no car.
