These days, a number of loan companies and banks make taking out loan repayment insurance a must when you take out a loan with them to purchase a vehicle. I remember the first time I came across one of these things. I started wondering what the heck they were and why on earth I had to get this policy and the more cynical part saw this as yet another money-making scheme on the part of the lenders.
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. And these things do happen. 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). 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.
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. They can even get a bit sneakier, calling the policy lifestyle protection insurance and guaranteeing to keep up your current level of income even once you’ve finished paying off the loan (this was the case with the one I was involved in). Politeness kept me from unleashing my inner Scrooge in fury at the slick, smarmy salesperson and letting him know that I lived by the policy of cutting my coat according to my cloth and knowing that you can’t expect champagne on a beer budget.
In the end, I got out of that nuisance policy by paying off the loan as quickly as possible (I had chosen a loan that allowed me to make lump sum repayments and pay the loan off early to minimise the interest we paid) and then cancelling the damn policy. It’s something that I recommend doing. You could also try the following if you don’t like the idea of this insurance:
- Hunt around to find a lender who doesn’t have this requirement (let us know about this and we’ll do the hard work for you).
- Amassing as large a deposit as possible to minimise the amount you borrow and thus the amount you repay and also the size of the weekly payments.
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.