When taking insurance out on a new car, it is important to make sure that any potential financial shortfalls in the event of an accident are covered.
This is according to Susan Steward of Budget Insurance, who said this can become an issue for a new car owner who is paying their vehicle off.
“At a time when many consumers are battling to make ends meet, the last thing you want is to have an accident where the car is written off and find out that you owe the bank a significant amount of money, despite having insurance cover,” said Steward.
When taking out car insurance, vehicle owners are typically given two options: insure the car for retail value, or market value.
The main difference is that:
- Retail value is based on the “blue book” or the TransUnion Auto Dealers’ Guide. It usually reflects the average price at which the vehicle has been sold recently.
- Market value is more specific to a particular car, and considers factors such as the mileage, condition, scarcity, and make of the vehicle.
“Retail value is typically higher than market value. So, when you insure your car, you ideally want to specify that it should be insured at retail value,” said Steward.
Where issues can arise, however, is if you buy a new car through a finance agreement and are charged upfront for interest.
“For example, if you bought a car for R250,000 with a R25,000 deposit and you financed it over seven years at an interest rate of 9.5%, you would have to pay a total interest amount of R84,351 – and the total cost of credit would be R316,355,” said Steward.
“Regardless of whether you insure your car for retail or market value, the reality is that if you are in an accident and the car is written off, the insurance payout is not going to cover the full amount you owe the bank.”
A remedy to this problem is “top-up” cover, said Steward.
This covers the difference between the insured value of the car and the amount you owe on your loan.
Other elements to consider when insuring your car are whether the policy covers a balloon payment, and if you add accessories to your car – such as a towbar or sound system – these will need to be specified in your cover.