Do I Need Insurance For My Payday Loan?
Insurance protects you against a possible eventuality. Payday loan insurance claims to protect short-term borrowers from missed loan repayment resulting from a shock-like loss of job, disability, or death. It also can prevent your credit score from getting worse. However, this insurance usually tends to be more expensive and can keep you in the debt cycle. A less expensive form of cover, like life insurance, maybe more suitable for you in the long run.
What is Payday Loan Insurance?
Payday loan insurance is a form of insurance issued by some lenders as financial protection to help their customers in loan repayment. This type of insurance covers your payment to a creditor during unforeseen situations, such as becoming ill, injured, suffering a medical condition, or being unable to work for a certain period of time.
Despite being an optional form of insurance, payday loan insurance protects your credit score from getting worse because it gives you the opportunity of repaying your loan on time.
What Do I Need to Know About Payday Rates?
For every $100 borrowed, lenders often charge $10 to $30 (this varies from one company and state to another). If we use $15 as an example, a $15 fee per $100 borrowed corresponds to a 391% annual percentage rate (APR) on a typical two-week payday loan. The annual percentage rate (APR) indicates the cost of borrowing money for a year. Credit cards, on the other hand, have an average APR of 15%.
Take for instance, you require a $500 loan. You are offered a two-week loan by the lender. For every $100 borrowed, there is a $15 cost attached to it. As a result, your cost will be $75. You can write a $575 check to the lender or enable the lender to debit your bank account electronically. You are then given $500 in cash by the lender. You pay the loan and the $575 two weeks later. Depending on how you agreed to repay the loan, the lender may debit your bank account, cash your check, or receive cash or another form of payment from you. The bottom line is that you paid $75 for a two-week loan of $500.
Many lenders may allow you to extend the due date for another two to four weeks if you can’t repay the loan when it’s due, but you’ll have to pay another charge. This is referred to as a “rollover.” The lender will charge you a fresh fee each time you roll over the loan, and you will still be responsible for the whole initial debt. Rollovers increase the loan’s cost extremely rapidly.
In the case above, instead of paying on the due date, you roll over the two-week $500 loan. You’ll have to pay another $75 for the rollover. You now owe $650 after adding the $75 to the $575 you already owe. The rollover reduces the cost of a $500 four-week loan to $150.
How Do I Get Credit Insurance?
Often, you can get loan insurance directly from your lender when you lookout for a payday loan if they offer such a service. But, you don’t need to get credit insurance from them. You can decide to leave it out or get it from another party.
Is Credit Insurance Right For Me?
You may decide whether or not to use credit insurance based on specific insurance policy requirements, your preferences, and any charges you may need to pay. For example, credit insurance comes with extra costs and may include hidden fees. If you are not satisfied with the terms they give you, you can decide to leave it out. Life insurance is another form of insurance you might consider because it is more affordable.
Why Should I Consider Credit Insurance?
- Payday loan insurance repays your loan on time if you encounter an emergency or miss a payment.
- It protects your credit score from getting worse.
- It continues to meet your loan repayments even if you lose your job or become ill or disabled.
- Credit insurance prevents you from leaving debt behind by paying all or part of your loan if you die.
Credit Insurance: Drawbacks and Reasons to Avoid It
- Credit insurance is usually expensive.
- It may involve paying hidden fees.
- You may pay extra interest if the premium is part of the loan.
- It has a less suitable policy compared with life insurance.
What Do I Need To Know Before Using Credit Insurance?
The Federal Trade Commission recommends you ask the following questions before deciding to buy credit insurance:
- What is the price for the premium?
- How much would be removed from your monthly loan payment aside from the credit insurance?
- Can you pay every month instead of financing the entire premium?
- What are the terms and conditions on payment of benefits? Get to know what’s covered and what’s not.
- Is the premium considered as part of the loan? If so, it means you’ll pay additional interest because your loan amount will increase.
- Will the insurance cover the entire length of your loan and the total loan amount?
- What is the waiting period before the coverage becomes effective?
- What coverage does a co-borrower have, and at what costs?
- What kind of refund is available if you cancel the insurance?
- Can you get a refund?
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I was offered insurance with my loan. Do I have to take it?
Loan insurance is not one of the requirements for loan approval. It is optional; therefore, you can decline if a lender offers it to you. If a creditor wants you to have credit insurance before approving your loan, you should avoid getting loans from such a provider and look for another one. Take time to shop around and see if there is one that offers you a better term.
Lenders are not permitted to either deny or refuse your loan if you choose to buy insurance elsewhere or don’t accept their offer of credit insurance. Suppose a creditor insists that you must use credit insurance before they grant your loan. In that case, you can inform your state attorney general, state insurance commissioner, or the FTC about the creditor.
Payday loan insurance provides financial support during a missed repayment but is relatively expensive and sometimes has hidden fees. Although some lenders might want to sell payday loans and installment loans with credit insurance, you can avoid buying them as they are optional and unnecessary.
Amanda is a senior financial copywriter at AdvanceSOS. Amanda has been writing about finance since 2015. She graduated with a Master’s in finance from the University of Oklahoma. As a result, she has a wealth of experience and knowledge to share with her readers.