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Finance managers have been known to present the product to problem credit buyers as “protecting an auto loan” which is actually a fairly accurate description. But the fact remains that credit-challenged borrowers, in particular, should have a basic understanding of how credit life insurance works.
Finance managers at car dealerships refer to it as “protecting a loan” and the fact is that even if you have poor credit it’s always a good idea to have an understanding of the basics of how credit life insurance works with auto loans.
Credit life insurance is essentially decreasing term life insurance.
Term insurance is a type of insurance that covers a fixed period and cannot be renewed. Unlike a whole life policy, it builds no cash value.
Decreasing term means that the payout amount matches whatever the loan balance is at any point during the loan. As the loan is paid off, the amount owed decreases and the amount of insurance covering the loan decreases to match the loan balance.
But once approved, there are often other choices that have to be made, one of which is whether or not to sign up for credit life insurance.
One thing we have learned from experience is that the key to a successful bad credit car loan means focusing on the basics. In this case, it means understanding both the pros and cons of credit life insurance.
The type of bad credit you have is as important as your FICO score if you are applying for a subprime car loan.