More and more lenders in both mortgage loans and smaller loans have begun to offer different types of loan protection insurance. The idea is to offer the borrower an insurance policy that enters in case you cannot pay off the loan due to unemployment, illness or death. For each insurance, you have to pay a premium, and loan protection is no exception. The question then is whether it is worth paying this premium?
This is how loan protection works
When you take out a loan, you take on an obligation to repay and pay interest on time. There is a built-in risk in this concept and many people want to minimize this. One way to reduce the risk of financial problems due to the loan – for example, that the case goes to debt collection or even to the creditor – is to take out loan protection. If you get a much lower income due to sick leave or unemployment, you simply have the loan protection to fall back on.
The loan cover as insurance normally covers the entire loan cost per month for a certain period of time. For sms loans, which run for a more limited period of time, the insurance usually applies for the entire term. Instead, the loan protection applies for a limited period of time for loan loans. If you become unemployed or on sick leave, you simply will not have to pay the monthly cost yourself. Instead, it is the insurance company that pays it.
Percentage high premium
Loan protection comes with a premium that is relatively high in percentage terms in relation to the loan amount. Exactly how the premium is calculated is different from player to player, but it usually costs quite a bit. For loan loans, a cost of between 3-8% of the monthly payment normally applies. For sms loans, there is usually a cost of between 1-4% of the credit used / what is left to pay.
Example: You take a sms loan of USD 9,000 in six months and sign up for loan protection. The premium is at 1.50% of the credit. In the first month you pay USD 135 in premium (USD 0.015 x 9000) in addition to amortization and interest. The second month you pay USD 112.50 (0.015 x 7500), and so on. You see quite quickly that the total cost of the loan protection becomes significant.
So, is it a good idea to sign up for loan protection? Only you can answer that, but if you choose this extra security, be prepared to pay quite a bit for it. As always: If you are in the least uncertain about whether your finances allow a loan, it is best not to.