What you need to know about personal loans credit insurance


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Personal loans can cover everything from debt consolidation to medical bills or even major life events like adoption or a wedding. But before you apply, you should know that monthly payments might not be the only associated cost. Some borrowers also purchase personal loan insurance to protect themselves from defaulting in the event they can’t make payments on time. However, the added security of personal loan insurance can be costly, and in some cases, unnecessary.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What is personal loans credit insurance?

Most loan protection insurance policies cover certain events for a short-term period, relieving you from having to make payments for a set period, usually between 12 and 24 months. According to the Federal Trade Commission, there are four types of loan protection insurance, each of which covers different situations.

  • Credit life insurance: If you pass away before repaying all of your loans, this policy pays off either some or all of your remaining balance.
  • Credit disability insurance: This is sometimes referred to as accident and health insurance, which gives you temporary relief from making payments if you can’t work for health reasons.
  • Involuntary unemployment insurance: If you get laid off or lose your job, this policy can cover your loan payments for a while.
  • Credit property insurance: When you use personal property as loan collateral, this insurance protects the property itself rather than your loan payments.

Who needs credit insurance?

In most cases, personal loan insurance isn’t worth it. The extra costs can make your loan more expensive and put you at risk of default. Also, if you have life or disability insurance, it’s likely more affordable than investing in credit insurance. Sometimes, however, personal loan insurance may make sense. If you have a loan that you can’t defer, for example or you’re concerned about debt due to a medical condition, job loss, or death, it can be a good option.

Cost of credit insurance

Credit insurance is almost always more expensive than other types of insurance such as term life insurance. The amount you’ll pay will depend on factors like loan or credit type, the amount of debt that will be protected and the type of insurance policy and lender you choose. Whether or not your loan or credit is open like a credit card or closed like an installment loan can also play a role in the cost of credit insurance.

Pros and cons of loan protection

The obvious advantage of loan insurance is that you can avoid making late payments or defaulting during circumstances out of your control. Even one late payment can damage your credit score and the more it drops, the more it’ll cost you to access other loans or credit in the future. As with most types of insurance, paying a little bit of money up front could potentially save you a lot in the long term.

On the other hand, just as with other types of insurance, you may not ever need to use your loan protection policy. It’s also important to understand the details of your policy to make sure you’re well covered because all policies come with exclusions.

Factors to consider

Before you take the plunge and move forward with personal loans insurance, think about these factors:

  • Your budget: Because loan insurance can increase the overall cost of your loan, look at your budget. Make sure you can afford it.
  • Your reason for wanting it: Loan insurance isn’t required. Ask yourself why it’s useful in your unique situation.
  • Other types of insurance policies you have: If you have life insurance, for example, credit insurance may not help you. This is particularly true if your reasoning behind it is to avoid debt after death.
  • Various offers: Personal loans insurance varies from company to company. Do your research and compare the premium rates and terms of the options at your disposal.
  • The fine print: Read the fine print of any policies you’re considering. Find out what will happen in the event you default on your loan.

Next steps

Personal loan insurance isn’t an automatic scam, but there may be limitations to how helpful it actually is. At the end of the day, you need to perform a cost-benefit analysis to make sure the extra policy expense is worth the coverage you receive. Rather than glossing over your plan, pay attention to the details on exclusions and the claims process to maximize your personal loan insurance when you really need it.