These days, a number of loan companies and banks require applicants to take out loan repayment insurance when seeking finance to purchase a vehicle. Most car buyers would be thinking why on earth they need to take out such a policy…in fact, many presume this is just another money-spinning initiative for lenders. This isn’t the case, however.
What is Loan Repayment Insurance?
The idea behind loan repayment insurance works more or less like this: if something happens to you that means that you can’t meet the loan payments, the insurance will cover the payments for you. Like we are seeing in the current economic climate, these sort of events should never be underestimated. People lose their jobs, have accidents, get sick and die (the latter tends to saddle the surviving significant other with the debt, especially in the case of joint ownership).
Is it actually useful though?
Now, if you’re already up to the neck in debt mortgages, other hire purchase agreements and credit card debt this can be a handy thing to have up your sleeve, as it means that the repo people aren’t likely to turn up and take your car away.
On the other hand, if you’re more of a frugal type who usually avoids debt as much as possible and is pretty good at budgeting so you meet your commitments, it can be more of a nuisance. Not only do you have to pay back the loan and the interest but you also have to pay the insurance premium and sometimes this premium is included in the principal amount borrowed so you have to pay interest on that as well.
What should I consider?
As always, you need to read the fine print very carefully before signing anything, and that includes a loan repayment insurance policy. For example, if you aren’t currently in paid work or if you are self-employed, you won’t need redundancy cover (self-employed people can’t fire themselves).
However, as mentioned earlier, they are often compulsory and in the case of some lending institutions, you can’t get a car loan without one. Sometimes the naming is tweaked to something like policy lifestyle protection insurance, which guarantees to keep up your current level of income even once you’ve finished paying off the loan.
Other options for those who don’t like the sound of this insurance include:
- Searching for a lender who doesn’t have this requirement
- Amassing as large a deposit as possible to minimise the amount you borrow and thus the total amount and size of repayments
You may, of course, be in a situation that makes this sort of insurance attractive. In this case, don’t forget to ask as many questions as possible, even if you feel stupid asking them.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.