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Car Loan Protection Insurance – What Is It?
●January 8, 2021●4 minute read
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What happens in the event of an unfortunate situation that renders you unable to pay off your car loan? Will the lender just forego and lose money? Absolutely not! They’re measures set up to protect you and the lender from such situations and one of these is the car loan protection insurance policy. But what exactly is it and how does it work?
What is car loan protection insurance?
Car loan protection insurance is set up to protect policyholders from financial risk by making your loan repayments in the event that you die, get incapacitated or retrenched from work. This insurance provides support in times of need. It lessens your worries, knowing that your loan repayments will be made in the event of an unforeseen situation.
This insurance is however not compulsory. Some lenders make it look like you have to get a car loan insurance before getting a loan, but it’s in fact not mandatory at all. However, they’re benefits and advantages that come with buying credit insurance.
How does it work?
A car loan protection insurance policy will help you pay off monthly debts in line with the maximum payout written in the contract. You can choose between short term and long term protection ranging between 12 to 24 months depending on your insurance provider. The insurance benefits can then be used to settle your car loan debts. You have to however be between the ages of 18-65 and be employed to qualify. Here are the two types of loan protection insurance policies;
This type of policy is very flexible. It doesn’t consider age, gender, occupation and other factors. You also get to decide the amount of coverage you want. The maximum coverage for this policy is 24 months.
With this type of policy, the cost of insurance is determined by your age. The insurance provider also gets to make the decision on the amount of coverage. The maximum coverage for this policy is 12 months. Young lenders, however, benefit more from this because the insurance cost is lower for younger people as they tend to make fewer claims.
It is important to also fully understand the terms and policies involved before settling for credit insurance. Here are the four main types of credit insurance;
- Credit life insurance
This type of insurance is set up to pay off your car loan if you die while the loan term is on.
- Credit disability insurance
This type of insurance covers the loan in the event of sickness, trauma and injury that renders you unable to work. It is also called accident and health insurance.
- Involuntary unemployment insurance
This type of insurance is designed to pay off your car debts if you get retrenched or lose your job by no fault of yours.
- Credit property insurance
This insurance protects the property used as collateral to protect the loan. Most times an auto loan uses your car as security for the loan. Credit property insurance will protect it in case of theft or accident.
What is the cost of car loan protection insurance?
Your insurance premium cost will be dependent on a number of factors such as your address/location, the type of policy you decide on (Standard or age-related) and the amount of coverage you’ll like. A car loan protection insurance can be quite expensive to buy and would even be more expensive if you have a bad credit score or poor credit history.
As said earlier, it is not compulsory, but if you decide it’s something you’ll need, you have to properly budget to accommodate the cost of the insurance. Large banks and lenders generally offer higher premiums compared to independent groups. Consider researching for an insurance provider that offers a discount on the insurance premiums. You can either buy the policy at a later time or buy it the same time you’re taking out a loan. Be careful of the latter because some lenders can add the cost of insurance to the loan you’re taking out and charge interest on both. Think about your options and costs before deciding on a policy that best applies to your financial need.
Pros of a car loan protection insurance
- It improves your credit score
A good credit score will help you secure better deals with future loans. You do not want the good record you’ve set on your credit report to be affected by an event you had no control over. A car loan protection insurance will ensure that your loan repayments are made no matter what, and this helps to keep your credit score intact or even improving it. The policy supports you to keep making due monthly loan repayments in case of an unforeseen incident.
A car loan protection insurance helps with anxiety that stems from being unable to repay a loan. It protects you and gives you peace of mind through your loan term.
Cons of a car loan protection insurance
A car loan protection insurance is an additional cost to the loan repayments you have to make. You already have so much to pay including your car’s insurance premiums. A car loan protection insurance might seem like extra weight. Lenders can also use this to make more profits from you by making you think your rates will be reduced with the car loan protection insurance policy. In a real sense, you might actually be paying double interest if you get your loan and policy together.
What you should look out for?
Insurance policies contain a lot of clauses so it’s important to properly scrutinize your contract for any lapses that might affect your claims. Take note of the terms, conditions and exclusions and review them carefully. Also, make sure you research and shop around to get the most competitive premium rates. Understand all the issues under your coverage and be sure the policy fits in with your need.
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Written by Jacaranda Team