Lenders sometimes sell payday loans and installment loans with credit insurance. This insurance claims to protect you against missed loan repayments, and it is usually expensive.
The U.S. insurance industry is huge, with net premiums written totalling $1.28 trillion in 2020, and lenders often sell insurance on their loans. However, you are not required by regulation to take the insurance. It’s a red flag if a lender says you must!
- The main thing to note is that you are not required to take out insurance on your payday loan.
- If a lender claims that credit insurance is mandatory, this should raise a red flag!
- However, lenders can sometimes sell payday loans and installment loans with credit insurance.
- There are some advantages to credit insurance, such as helping with missing payments and avoiding damage to your credit score.
- There are also some disadvantages, such as hidden fees, high costs and additional interest charged.
What is Payday Loan Insurance?
Lenders sometimes offer customers loan insurance with their payday or installment loan. This protects the consumer in the case that they cannot repay the loan on time.
Credit insurance is optional insurance that will cover your payments to the lender in particular situations, such as if you become ill or injured and can’t work, if you become disabled, or die.
If you miss payments or encounter an emergency that prevents you from repaying your loan on time, the payday loan insurance will cover you to avoid any damage to your credit score.
How Do I Get Credit Insurance?
In most cases, you can purchase credit insurance directly from your lender when you acquire your payday loan. The lender can promote a type of insurance policy to you when you’re purchasing your loan.
However, a lender should not require you to buy it, and if they do then it should raise a red flag!
Should I Get Payday Insurance?
Before deciding to buy a credit insurance policy from a lender, consider your requirements, your choices, and any charges that you may need to pay.
You may conclude that credit insurance is not necessary for you. Credit insurance can be a very expensive type of cover and may include hidden fees.
Moreover, in your situation, another form of cover may be more suitable. For example, it could be less expensive and more practical for you to get life insurance than credit insurance.
Advantages of Credit Insurance
There are some advantages to taking out a credit insurance policy. For example, if you miss a loan repayment, the insurance policy can cover you, if you become unemployed or disabled, insurance can continue to meet the repayments.
Credit insurance can pay all or part of your loan if you pass away to prevent leaving behind debt.
You can also use credit insurance to avoid damage to your credit score.
Disadvantages of Credit Insurance
As well as the advantages to credit insurance policies, there are also some drawbacks to consider before taking out credit insurance. Firstly, it is usually very costly and may include hidden fees. Moreover, if the premium is financed as part of the loan, you’ll end up paying additional interest.
Therefore, another form of cover may be more suitable, e.g. life insurance.
I Was Offered Credit Insurance With My Loan – Do I Have To Take It?
You are not required to take out payday loan insurance from your lender. If the lender continues to pressure you to take insurance, consider looking elsewhere. It’s a red flag if the lender tells you that you must have insurance. If a lender insists that you have to have insurance, you should avoid that loan and carefully review your papers to be sure they have been accurately drawn up.
Remember – lenders can’t deny you credit if you don’t take out optional credit insurance. They also cannot refuse your loan if you choose to buy insurance elsewhere and not directly from them.
If a lender tells you that you’ll only get the loan if you buy optional credit insurance, report the lender to your state attorney general, your state insurance commissioner, or the FTC.
I Don’t Have Credit Insurance, But Now Can’t Meet Repayments. Now What?
Don’t panic! You’re not the first and won’t be the last borrower to struggle with repayments. The first step is to let your lender aware of your situation. Remember, your lender is your borrowing partner and is there to assist you.
In many cases, a lender will curate a new repayment plan with you, suited to your new circumstances. Alternatively, you could approach friends or family for assistance if you are really at a loss.
If you are feeling helpless, it may be beneficial to contact a financial advisor and seek professional advice.