Shortfall

Meaning and Definition

Shortfall, in the context of car finance, refers to the difference between the amount owed on a car finance agreement and the actual value of the vehicle. It occurs when the outstanding finance amount exceeds the market value of the car. The shortfall represents the financial gap that the borrower needs to address, either by paying off the difference or through other means, such as insurance coverage.

Why it is important to know

Understanding the concept of a shortfall is important for car finance borrowers as it highlights the potential financial risk associated with the agreement. If the borrower encounters circumstances where they need to sell the vehicle or settle the finance agreement before the loan term ends, a shortfall could arise. Recognizing this possibility allows borrowers to make informed decisions and consider options such as gap insurance to mitigate the financial impact of a shortfall.

Example in car finance

Suppose a borrower has a car finance agreement with an outstanding loan balance of £15,000, but due to market conditions and depreciation, the current market value of the vehicle is only £12,000. If the borrower decides to sell the car or settle the finance agreement early, they would experience a £3,000 shortfall (£15,000 - £12,000). In this situation, the borrower would be responsible for addressing the shortfall by paying the difference out of pocket or exploring alternatives such as gap insurance coverage to bridge the gap and avoid financial hardship.