When you borrow out, you make regular installments. Life is uncertain though. What would happen in case you lose your job, get sick or cannot work? It is in that case that we have debt protection. Debt protection on a loan is a financial safety measure that protects you against the stress of defaulting on a loan in case of any stressful situations. The way this works may assist you in deciding whether or not to add this to your loan contract.
How to Protect Your Debt on a Loan?
Debt protection, also known as loan protection insurance or payment protection, is a product that is provided by lenders to protect your loan repayments in case you are financially strained. It serves as an insurance net which stops or insures your payments in case you cannot afford to do so in certain reasons as due to loss of employment, disability or death.
As an illustration, in case of some unforeseen event such as loss of a job, debt protection can enable you to cover most of the debts or have them deferred after a few months. This will ensure that your loan does not fall into default and spoil your credit rating.
Lenders provide this option on credit cards, auto loans, and personal loans in most instances either as an optional add-on or as a condition of the loan.
The Debt Protection Process
The debt protection is done by charges of a small fee or percentage on your ordinary loan payment. This is the premium which goes to cover the protection plan. Should any qualifying incident arise such as the loss of employment or disability, you can make a claim to your lender. On approval, the lender will stop your pay or make your pay on your behalf within a specified duration.
Depending on your plan, the coverage can be as short as you like. There are those policies that cover a few months of protection and those that could cover a year or longer. As soon as you are financially cured, your payments go back to normal.
The terms should be properly read since different lenders have different coverage terms. As an example, certain plans are not applicable to resignation but involuntary unemployment or may not cover medical conditions that already exist.
Debt Protection Plans Types
There are normally three broad categories of debt protection:
Job Loss Protection: This is optional coverage that will cover your loan payments when you become unemployed as a result of no fault.
Disability Protection: Assistance in case you are unable to work because of sickness or accident.
Life Protection: This is a type of insurance that settles up the balance of your loan in case of death during the repayment period.
Other lenders offer all these features as a single plan whereas there are those who will only offer you the protection that you require.
Advantages of Debt Protection
Debt protection does not simply provide a person with a sense of relief but also peace of mind. In case something outside your control hits your earnings, the knowledge that your loan payments will be safe will ensure that you save yourself late fee, punishments and damages to your credit rating.
It will come in handy particularly in cases where you have dependents or your financial status is crunchy. As an example, individuals who have mortgages or auto loans will be at an advantage because they will not lose their house or cars in the event of loss of income temporarily.
The other advantage is convenience. Majority of the debt protection schemes are simple to start with your lender, without the tedious insurance documents.
Drawbacks and Limitations
Debt protection is good but not the right option to everybody. The second disadvantage is an extra cost. The monthly payment or the premium may appear negligible though it may accumulate with time. You might not require this supplemental coverage in case you have a good emergency fund, or you have several sources of income.
Further, not every claim is accepted. Certain plans are very strict in terms of eligibility. Some voluntary resignation, loss of self-employment, or some medical problems may not qualify, to give an example. It is important to look at your agreement before signing in.
Is Debt Protection Worth It?
The question of whether it is worth it or not in terms of debt protection is a personal issue. You may not need it, provided that you have savings to pay all of a couple of months of expenses and your job is secure. Nonetheless, in the event of a livelihood that is paycheck to paycheck or where you have dependents that are dependent on your earnings, this coverage can be the most important safety net.
Debt protection is the best during the uncertain economic periods or when the financial situation is unpredictable. It is an intelligent alternative to individuals who have big loans like mortgages, car loans or personal loans, and missing on payments can have severe long term consequences.
How to Get Debt Protection?
Debt protection is usually an option that most banks, credit unions and other financial institutions provide with a new loan. It is also available to request after your loan is in effect. Get the cost and coverage information of various lenders before enrolment.
When you already have life or disability insurance, check the coverage that you have- you might already be covered. In other instances, the extension of loan protection may be redundant to similar benefits you may have.
Financial planning tools such as The Debt Freedom Advisor or Amortization Calculator on Rich brother Finance can also help you estimate the repayment schedule and know how debt protection might affect your budget monthly.
Final Thoughts
Debt insurance of a loan is a form of financial secure against the uncertainties in life. It also lets you take responsibility in borrowing because you will be sure that even should some misfortunes befall you, you will not end up destroying your credit report or defaulting. Although it is associated with extra expenses, it may help provide the precious peace of mind to a person with low financial mobility.
Always consider the advantages and disadvantages and consider the fine print before making a decision. In case of doubts, consult an expert in finance that can analyze whether it is a good decision to your financial objectives.
FAQs
Yes, they are similar. A common form of insurance is debt protection which protects your loan.
No.Your credit does not get affected when you join a protection plan. Actually, it has the capacity to avoid late payments which would otherwise damage your score.
Yes. The majority of lenders would not charge you to cancel debt protection at any time, however, you should always see what your loan agreement entails.
No. It’s an optional add-on. Lenders may not compel you to purchase it in order to obtain a loan.
