Are the terms of your finance leaving you exposed?

On a forum last week, I came across a post where a bloke had previously bought a modern 4X4 on a 5 year finance plan.  Just over 2 years into the arrangement, someone drove into him, resulting in the vehicle being written off (and just outside the New vehicle replacement timeframe of most insurance policies).  He had insurance (not with Club 4X4), and ended up having to make a claim through his own insurer to try to get an agreed value after the other party tried to only offer him market value on his vehicle, even though the accident wasn’t his fault.

Not the vehicle in question, but a similar accident…

However, when it came to his finance provider (who I’ll not name given I’m not a finance expert, nor do I have all the gory details of the agreement), he claimed that there was a clause where he was made to pay out the full 5 year loan, including interest, despite being just over 2 years into the contract.

The end result?  He couldn’t actually afford to replace his vehicle because he owed the finance company money when it came to paying up the loan! He had to then settle for a vehicle older and inferior to what he had due to the financial burden this caused.

It seems crazy that he should have to pay 5 years of interest on a loan that only lasted 2 years.  Maybe there’s more to the story, and maybe he signed up to a clause that clearly stated this? It got me thinking – what would happen from a finance perspective if the vehicle was a total loss in different loan types with different providers?

I tried ringing a few finance companies to see if they knew of any situations where this might be the case, and only 1 answered my questions and their response was simply ‘we only charge you the outstanding amount right now.’ They claimed that in the event of an accident, if financed with them, you just pay the amount owing on that day and they get you into a new loan.  To be honest though, that sounded way too good to be true.  I also asked about the difference between secured and unsecured loans.  The lender suggested that on an unsecured personal loan, the loan would continue until it was totally paid, but that the customer could use the proceeds from insurance to either repay the loan and close it out, or just buy another vehicle.  I’m pretty sure a secured vehicle loan, which offers cheaper rates for security on the vehicle wouldn’t work the same way though, with the debt needing to be settled on the loss of the asset.

I then started doing some basic maths (and this isn’t perfect, just demonstrating the principle).  On a secured car loan these days, the rate seems to be around the 7% – 10% mark depending on the type of loan, so using an online calculator, over 5 years on a $50,000.00 loan you’d stand to pay $10,000 – $15,000 in interest. So the exercise would actually cost you $60,000-$65,000.

Without doing the detailed maths, at $230.00 per week as a payment, in 12 months, you’d have paid $11,960.00 off the loan, less interest.  At 7% interest, you’d have accrued somewhere around $2,500-$3,000 in interest in the first year, which means you’ve probably lowered your loan by about $8,500.00.

If we then apply depreciation to the value of the vehicle at a flat rate of 10%, your vehicle is now worth $45,000 and you still owe $41,500.00

Go another year, and say you reduce the loan by another $8,500.00,  After 2 years, your vehicle value is $40,500, and you now owe $33,000.00 (in our scenario).

In theory, if the vehicle is written off, you are in front, which means the loan can be settled and you’ll get something back.  However, if the finance company has terms which commit you for the full term of the loan, then you may find that with early termination fees etc, you actually owe the finance company money when all is said and done.

As I said, I’m no expert in this area – but, I’d hate to read the fine print on my finance contract to find out that if someone else caused me to lose my vehicle that I might still owe someone money after the insurance is paid out!

In closing, I don’t know enough about the specifics of this situation I mentioned above to know if the story this guy shared is legitimate, or whether I only got part of the story.  What I do know however, is that this is probably an area or scenario most of us haven’t thought about.  My Advice?  If you’ve got finance on your vehicle check with them to make sure you know what to expect if the worst were to happen.  And make sure you’re comfortable that the sum insured on your vehicle accurately reflects what your vehicle is worth. 

If you’re an existing Club 4X4 customer (or even if you’re not) we’d always welcome the chat about your sum insured value to make sure its right, just in case. Right at the moment, industry price guides are simply not keeping up with pricing changes and values, something most regular insurance companies just don’t understand (for more on this see this article from our GM published by 4X4 Australia)

As always, take care.

Aiden

Have you had any issues with finance after having a vehicle written off?  Do you know more about how all this actually works and want to share your knowledge?  We’d love to hear your thoughts in the comments below.

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Comments 3

  1. Hi, I have been involved in the finance industry for 30+ years. Your assessment is largely correct as is your advice. It is easy to just sign the documents to get our new car without asking questions. My advice, stick to the major financiers (assuming you have good credit). The scenario described would only occur with second or third string financier or worse. It is very rare, but does happen. The issue with Insurance payouts is a whole other can of worms too. When combined……..who knows what can happen !! There are no easy answers with this and it is never one size fits all.

  2. Been in Finance industry 21 yrs.
    own my own finance brokerage specialising in consumer and commercial finance. Have over 45 lenders on my panel. Major lenders all the way down to subprime including secures and unsecured. I’ve never seen this clause in any others contracts.

    That’s not to say that type of clause is not out there. Always read the fine print, ask questions and know what you are signing for.

  3. I was in a similar agreement some time ago but luckily did not find out the hard way like the person in the article. I had financed through a major leasing company and part way through I requested a payout figure although I can’t remember why. The figure was more than the vehicle was then worth and the reason given to me was that all the interest for the full period was paid first and then the principal. So the first year or more of payments actually took nothing off the amount borrowed. So had the car been written off I would have been in a similar situation. And this was a fairly major finance provider.
    It pays to read the fine print and ask questions if you can.

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