When you insure a vehicle with a fully comprehensive insurance then you may be forgiven for thinking that you are as protected as you can be. However if you have a finance agreement on the vehicle, then you could be left in a position whereby there is a difference between the vehicle value and the outstanding finance settlement. If indeed the finance settlement is higher than the vehicle value, this is called a ‘Shortfall‘, and means you could be left with a financial headache.
In this situation, where a shortfall has occurred, then you are still responsible for the difference between the value of the vehicle and the finance settlement amount. You may assume that the finance company will just let you carry on paying your monthly instalments, however this may not be the case. In some ways a hire purchase agreement is a little like a mortgage on a house, as it it linked to a physical item. This means that if the item if lost (eg it is written off) then there is not item left to pay for. The finance company could demand payment in full immediately for the finance settlement.
So you may be faced with a substantial bill that requires immediate payment, not great at all when you are looking for a new car.
Why do financial shortfall’s occur and when are they likely to happen?
This phenomenon of a financial shortfall occurs when the vehicle value drops at a faster rate than the finance settlement. This is likely to happen in the early to mid stages of a finance agreement, with an redressing of the balance later in the term.
This type of shortfall situation is more prevalent when you have a longer finance agreement, say four or five years, and a small deposit to boot then you have much more of a chance of this type of shortfall occurring. Of course you could consider the simplest solution to protect against such a situation, which may be to take a Finance Gap Insurance policy.