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How credit insurance works on a loan

Though it protects your credit score from taking a hit, credit insurance can be costly.

It’s hard to predict what will happen after you take out a loan. If an accident or unexpected job loss pushes you into defaulting on your loan payments, it can seriously damage your credit and finances. Should you find yourself unable to repay your loan, credit insurance is designed to prevent the worst-case scenario from deeply affecting your credit score and finances — but it can be expensive and, ultimately, may not be worth the cost.

What is credit insurance?

Credit insurance is a type of insurance that covers your repayments if you can’t make them due to unforeseen circumstances. It can prevent default and damage to your credit score if you become disabled or unemployed before your loan is fully paid off, and it typically lasts for the life of your loan.

Your lender might suggest credit insurance if you have less-than-perfect credit and are looking for a car loan, auto equity loan, mortgage or unsecured personal loan. It’s also often suggested to borrowers ages 65 and older.

  • You might also see lenders refer to credit insurance as payment protection or payment protection insurance.

Do I have to buy credit insurance if my lender suggests it?

No, a lender cannot force you to buy credit insurance, nor should they be pressuring you to buy it. If a lender is pressuring you to purchase credit insurance, you should avoid taking out a loan with them as this should raise red flags.

5 types of credit insurance

There are five common types of credit insurance you might come across, though many lenders bundle them together:

  • Credit life. Covers loan repayments if you die before fully repaying your loan.
  • Credit disability. Covers some — but not all — of your repayments if you’re injured while paying off your loan. Also called credit health or accident insurance.
  • Credit involuntary unemployment. Covers some of your repayments if you’re laid off or become unemployed for a reason that’s not your fault.
  • Credit family leave. Covers a few monthly repayments if you need to stop working to take care of a newborn or sick family member. Also called credit leave of absence insurance.
  • Credit property. Covers the personal property you use to secure a loan if that item is stolen or damaged. It’s most common with financing offered by furniture or jewelry stores.

How much does credit insurance cost?

The cost of credit insurance depends on personal details and your specific loan. Factors that affect the cost include:

  • Where you live. Different provinces or territories will likely enforce different regulations that limit how much your lender can charge you. Premiums may also differ depending on your location.
  • Loan amount. Typically, the more you borrow, the more you’ll pay each month for insurance.
  • Loan term. Insurance for longer loan terms are typically more expensive than for shorter terms.
  • Insurance type. Different types of insurance require different amounts of coverage, which can affect the price. For example, credit life insurance covers all repayments if you die, while family leave covers only a few repayments while you’re not working.

8 questions to ask before getting credit insurance

Credit insurance isn’t always necessary and there are many credit insurance scams out there. Ask yourself the following questions to learn whether you could benefit from purchasing credit insurance:

  1. Do I already have life or disability insurance? If you do, chances are good that your insurance policy covers loan repayments after an injury or death.
  2. How does the cost compare to traditional insurance? If you don’t yet have life or disability insurance, getting policy quotes from insurance providers first can shed light on whether your lender’s offer is a competitive deal.
  3. Can I afford it? Credit insurance increases the cost of your loan, sometimes significantly. Make sure the cost can fit in your budget.
  4. How does the premium work? Is the premium added to your entire loan amount — which means you’ll pay interest on it — or is it something you pay separately each month?
  5. What does it cover? Carefully read the fine print to make sure you understand what’s covered under specific circumstances.
  6. Can I cancel my policy? Ask whether you can cancel coverage within your loan’s terms — and, if so, whether you’d qualify for a refund.
  7. When does coverage go into effect? Some credit insurance policies require a waiting period, meaning your insurer might not pay out your benefit immediately.
  8. Is my cosigner covered? If someone else is also signing your loan, ask if they’re covered and to what extent.

Ready to apply for a loan? Compare loans here

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Spring Financial Personal Loan
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17.99% - 46.96%
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SkyCap Financial Personal Loan
Finder Rating: 4.1 / 5: ★★★★★
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12.99% - 39.99%
$500 - $10,000
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Requirements: min. income $1,200/month, stable employment, min. credit score 550
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Fairstone Unsecured Personal Loan
Finder Rating: 3.9 / 5: ★★★★★
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26.99% - 39.99%
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Loans Canada Personal Loan
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FlexMoney Personal Loan
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18.90% - 46.93%
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Loan Away Personal Loan
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19.90% - 45.90%
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Fairstone Secured Personal Loan
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3 tips before signing up for credit insurance

Credit insurance isn’t always a helpful addition to your loan — especially if it makes your loan more expensive than you can afford. When considering credit insurance coverage, know that:

  • It’s never required. You’re not required to buy credit insurance — although some lenders will strongly recommend it. If a lender says you must purchase credit insurance to get a loan, look elsewhere.
  • It’s not included in the APR. Sometimes lenders push credit insurance on low-credit borrowers to increase the cost of the loan without having to increase the APR.
  • It can increase your loan amount. Some lenders add your credit insurance premium to your loan balance, meaning you’ll pay more in interest over time. This can lead to higher monthly repayments, which you might not be able to afford.

Read the fine print

An untrustworthy lender might try to sneak credit insurance into the terms and conditions of your loan. It’s another reason to carefully read your loan contract before you sign it.

If you notice terms that sound like they’re referring to something like credit insurance, ask your lender. You should find another provider if yours tries to pressure you into buying credit insurance.

Credit insurance alternatives

Not sure whether credit insurance is right for you? Consider one of these options instead:

  • Traditional insurance. Disability or life insurance is often less expensive than credit insurance. It also might cover more situations, and you’ll never pay interest on it. Plus, the payouts from these insurance plans can often be larger than those that come with credit insurance.
  • Help from friends and family. Talk to your loved ones to come up with a plan for how to handle personal expenses, including loan repayments, should something happen to you. They may be willing to pitch in.
  • An emergency fund. By putting funds aside for an emergency, you’re in a better position to cover an unexpected change in your finances, eliminating the need for credit insurance in the future. If you don’t have an emergency fund, get started with a high-interest savings account that can accelerate the growth of your savings.

Bottom line

Credit insurance might protect your credit score from the effects of default if you’re unexpectedly unable to pay off your loan, but it’s often more expensive than life or disability insurance, and it can significantly increase the cost of your loan. Before signing up, look into the cost of a traditional insurance plan or try setting up an emergency fund that can cover you in the future.

Learn more and compare lenders in our comprehensive guide to personal loans.

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