Should You Purchase Loan Insurance?
An explanation of what loan insurance is, along with each type so you can be the judge as to whether it’s a worthy investment or not for your situation.
August 12, 2021
The term “insurance” rarely brings about any feelings of positivity or happiness.
Often, it feels like a necessary evil that we’re required to keep paying to function in today’s society. Sure, there are exceptions. Ask anyone who’s ever lost their home or was in a major accident, and they’ll probably tell you insurance was worth every penny.
But is that the case for all types of insurance? People get insurance on their cars, homes, and even on their loans.
What is loan protection insurance, you ask?
In this article, we’ll explore the definition of loan insurance along with each type so you can be the judge as to whether it’s a worthy investment or not for your situation.
What is loan insurance?
General loan insurance may sound complex, but it is actually quite simple to understand. Loan insurance helps mitigate the risk of loan default. Depending on the type of loan insurance you buy, it may protect the borrower or the lender.
For the most part, it exists to protect the borrower. If the borrower gets sick, injured, disabled or laid off, the loan insurance will kick in for a period of time to ensure specific debt payments have proper coverage. When you’re down and out, the last thing you want is to lose your home, car or ruin your credit by missing payments.
Getting loan insurance means you get short-term protection, which generally lasts anywhere from 12-24 months, depending on the policy’s terms. You can use it for car loans, personal loans, credit cards and even mortgage payments.
Under what circumstances is personal loan insurance a good idea?
There are many variations of loan insurance, and they’ll vary in price, terms and conditions. Credit history is a major factor in being approved for a loan, as is the total outstanding balance of your debt. You’ll also need to require proof of employment.
In some cases, credit insurance or loan insurance feels like the right move. In others, it feels downright unnecessary. Let’s take a look at all of your options:
People get personal loans for various reasons, from home remodeling costs to wedding expenses and even debt consolidation. People can pool all their debts with a personal loan, so they have just one payment and often a favorable interest rate.
It’s challenging to go through big banks if your goal is consolidating debt, which is where Tally comes in. Sync your credit cards to your Tally account and let the smart debt repayment tool do the rest. The advanced algorithm behind Tally will shift payments to higher interest cards, ensuring you’re never incurring late fees. Tally* offers a low-interest line of credit to qualifying members, helping your debt disappear faster.
Getting some form of credit insurance or loan insurance often feels like a wise investment on some personal loans. But in the case of debt consolidation, some may choose to skip it.
Americans owe nearly $1.4 trillion in auto debt. Naturally, credit insurance for auto loans is a big business, and it works in roughly the same ways as most loan insurance. Electing credit insurance for your auto loan means a higher monthly premium, along with paying more interest over the life of your loan.
However, if you die, it’ll pay off all or some of your loan. If you get in an accident, get sick or get injured and can’t work, it will make payments on your loan for a specified period of time. The same is true if you lose your job in a manner out of your control, which includes layoffs.
Auto loan insurance may be worth it, but if it’s debt or severe injury you’re worried about, then your disability insurance or life insurance would likely take care of all that for you, which makes auto loan insurance less lucrative. If you have disability or life insurance, check your policy before taking on auto loan insurance.
If we’re talking about Private Mortgage Insurance (PMI), you may not have a choice as to whether you’ll buy it or not.
Private Mortgage Insurance is a type of insurance borrowers get as a condition of conventional mortgage loans. Typically, it’s required if a homebuyer doesn’t put at least 20% of the purchase price down on the home at closing.
It exists to protect the lender’s overall investment. Lending hundreds of thousands of dollars to someone who’s put nothing down is a substantial risk, and requiring PMI insurance helps mitigate those risks. Thankfully, PMI isn’t a life sentence. Once you’ve built enough equity in the home, the lender will no longer classify you as a risk, and you can apply to stop paying PMI.
In some cases, you may even run across LPMI (Lender-Paid Mortgage Insurance), which is similar, but the lender pays for it. In reality, you’re paying for it because the lender increases your interest rate to offset their costs.
Student loans are one of the most challenging debts to escape from. Even bankruptcy doesn’t free you from its clutches. If you’re late with a federal student loan payment, it’ll likely cost you a 6% late fee premium based on your unpaid balance. If you’re consistently late, the lender can report you to the credit bureaus, which will negatively impact your credit score. You may even lose future loan benefits, which means you may not get the chance to finish school.
And that’s not all. If it’s a federally backed student loan, the government could even take what you owe out of your tax refund or garnish your wages, so you get less money from your employer. They can even go so far as suspending your professional licenses or putting a lien on any property held.
This is one case where loan insurance may not be a bad idea. If the rates are favorable, it’s wise to do whatever you can to avoid common student loan mistakes and any chance of default.
The bottom line
Achieving financial freedom and getting more peace of mind comes down to the actions you take for your financial situation. Purchasing loan insurance can give you some much-needed security and confidence during tough times.
If your credit card debt feels as foreboding as insurance, consider Tally to help you repay your debt smarter, faster and easier.
*To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Tally Technologies, Inc. NMLS # 1492782 (nmlsconsumeraccess.org). Loans made or arranged pursuant to a California Finance Lenders Law License or other laws in your state.