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Car loan insurance
Get car loan insurance to cover your loan payments if you get sick, injured or can no longer work for an eligible reason.
Car loan insurance is a latecomer to the insurance scene and is more commonly called credit insurance. Credit insurance isn’t exclusive to car loans and you can get it on just about any type of loan or financing you have. The purpose of this insurance is to help you pay back your loans in situations where you’re no longer able to work or make payments on your own.
When you’re applying for a car loan, you may be asked if you want to buy car loan insurance to protect your investment. Just be aware that this type of insurance isn’t mandatory and often isn’t worth the cost, so proceed with caution.
How does car loan insurance work?
Car loan insurance (also known as credit insurance) is designed to help you pay off your loan in the event that you lose your job, become critically ill, get seriously injured or die in an accident. The purpose of car loan insurance is to give you peace of mind that you and your loved ones won’t be burdened with your car loan debt if you can no longer work for an eligible reason.
This type of insurance is never mandatory and any lender that claims it is should be avoided at all costs. That said, it is sold as a legitimate insurance product by many banks and lenders. But it often comes with tons of exclusions and restrictions, and for this reason may not be worth the extra cost.
Is there another way to protect my car loan?
Before you sign up for auto loan insurance, you may want to check that your life, health or auto insurance doesn’t offer similar benefits. Many of these policies will give you disability payments or a portion of your former income if you get injured in an accident or develop a critical illness.
Even if this type of insurance isn’t designed to make your payments directly, it will still give you enough money to stay afloat during difficult times. This means you won’t have to shell out more money for car loan insurance to get the same level of protection.
How can I sign up for car loan insurance?
You can usually get auto loan insurance directly from your car dealer, though this may not be the best choice. If you’re interested in signing up, it helps to compare several insurance providers at once to find the best rates. As a starting point, you may want to request quotes from several private insurers, credit unions and all of Canada’s Big Five banks.
You might also be limited to getting loan insurance from your lender, though you aren’t required to sign up even if they pressure you. Once you’ve signed up, you’ll usually be required to pay a recurring premium when your loan payment is due. You may also be able to make a one-time payment that will typically come out of your account as soon as your loan is approved.
What types of car loan insurance can I get?
There are various types of car loan insurance you can get to pay off your loan if you’re unable to work. Some policies may be all-inclusive while others could have a number of exclusions. The following forms of car loan insurance are the most common:
- Credit life insurance. This type of insurance will pay off your car loan if you die. This makes sure that your family isn’t stuck footing the bill for an expensive vehicle.
- Credit disability insurance. With this insurance, your loan will be paid off if you’re injured in a serious accident or become critically ill and can no longer work.
- Credit unemployment insurance. Unemployment insurance helps you make your car loan payments if you lose your job through no fault of your own.
How much does car loan insurance cost?
The cost depends on personal details and your specific car loan. Factors that may affect the cost include:
- Personal factors. You’ll usually pay different amounts based on personal features such as your gender, occupation, health condition and location. Different provinces will also enforce different regulations to limit how much your lender can charge you.
- Loan term and amount. You’ll usually need to pay higher premiums if you borrow a higher amount of money. It will also cost you more to insure a loan with a longer term (for example, taken out over the course of 7 years instead of 3).
- Insurance type. Different types of insurance require different amounts of coverage, which can affect the price you pay. For example, credit life insurance covers all repayments if you die, while job loss insurance covers only a few repayments while you’re not working.
Things to consider before you sign up for car loan insurance
Car loan insurance can help to protect you in certain situations where you might not be able to make your car loan payments. That said, this type of insurance is often very expensive and comes with many exclusions. For this reason, you should think very carefully about whether it’s a good choice for you.
Another factor to consider is that many car loan insurance products aren’t sold by licensed insurance reps which can make them particularly risky to sign up for. Loan insurance scams are also commonplace and you’re more likely to be subject to one if you decide that loan insurance is a must-have when you sign up for your vehicle.
If you decide to go for car loan insurance, you should make sure to source it from a reputable lender (such as one of Canada’s Big Five banks or a well-known credit union). These providers are often better placed to offer legitimate insurance products that will actually protect you from defaulting if you can no longer make payments on your loan.
Must read: Read the fine print
An untrustworthy lender might try to sneak car loan insurance into the terms and conditions of your car loan. It’s another reason to carefully read your loan contract before you sign it. If you notice that your loan conditions mention or make reference to credit or car loan insurance, ask your lender for clarification.
If you feel like they’re trying to pressure you into buying car loan insurance with your consent, don’t hesitate to cancel the deal and switch to a reputable lender. Also be aware that under no circumstances should you prepay for loan insurance before you receive your loan. This is a common scam that could leave you short a few hundred dollars with nothing to show for it.
Compare car loan options
Car loan insurance alternatives
Not sure whether credit insurance is the right fit for you? Consider one of these options instead:
- Purchase traditional insurance. Disability or life insurance is often less expensive than car loan insurance. It might also cover more situations, and you’ll never pay interest on it. On top of this, the payouts from these insurance plans can often be larger than those that come with car loan insurance.
- Ask for help from friends and family. Speak with your friends or family members to find out who might be in a position to help you with a short-term loan or some other form of zero interest financing if you run into issues that prevent you from working. This can be a better solution than signing up for car loan insurance as a contingency plan.
- Set up an emergency fund. Use the money you would spend on insurance to set up an emergency fund. This will make sure that your car payments are covered if you can’t work for a period of time. The money will also turn into savings once you pay off your vehicle in full. If you don’t have an emergency fund, you can get started with a high-interest savings account.
It might make sense for you to purchase car loan insurance in some instances, but these are less common than you might think. You will often be better off getting your car loan payments covered by your life or disability insurance if the need arises. Find out more about what car loan insurance is, how it could benefit you and what your alternatives are.
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