Due to continuous insurance coverage being mandatory while financing a vehicle in most cases, South African banks can automatically add car insurance premiums to monthly finance payments should the customer fail to prove that they are insured.
Nedbank’s vehicle financing division, Motor Finance Corporation (MFC), said it had to implement the strategy to add temporary limited cover to a client’s policy in July 2021 following an increase in clients who cancelled their coverage on the same day they collected their new vehicle.
Insurance is usually only necessary to purchase a vehicle through a bank loan, but not to keep it, and many consumers struggle to afford both payments or want to buy a flashier ride than they probably should, and therefore choose to cancel their insurance soon after taking delivery of their new car.
In the case of MFC and another prominent loan provider, the clause is agreed to when the client signs the finance agreement and stipulates that the bank holds the right to cancel the contract completely if it does not receive valid proof of insurance cover.
However, the finance house has instead opted to add limited cover to the customer’s monthly premium on their behalf to provide a reasonable degree of protection for both parties involved, even though it is not obliged to do so.
“The policy referred to in this clause will not necessarily be a like-for-like replacement of the policy previously in place, and will not necessarily cover all insured events covered in any previous policy,” MFC told MyBroadband.
“The intent of issuing these policies is not to replace the current insurance cover but rather to assist the client during an uninsured period and offer the client time to obtain insurance again. Should the client obtain insurance and provide proof of such to MFC, the issued policy will be cancelled.”
MFC affords its clients approximately 45 days to supply their most recent proof of insurance from receiving their first communique from the bank.
“This allows a client sufficient time to obtain such and to share it with us,” it said.
A finance nightmare
The ease of cancelling insurance nowadays has created a finance nightmare not only for the customer, who would remain responsible for paying off a vehicle in the event of theft or a write-off, but also for the bank that provided the loan, said MFC.
If an individual’s car has been written off they will need to purchase a new one which in turn results in two monthly vehicle payments.
Generally, this leads to late payments to the bank or debt restructuring agreements that allow the customer to pay smaller monthly instalments over a longer period, neither of which are ideal for the credit provider.
Additionally, many motorists change their insurers during the course of vehicle ownership but fail to notify their loan originator of this change.
A new insurance plan may not provide sufficient coverage to stay within the bounds of the original contract, which has implications for both the driver and the finance house.
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