Yet another choice dealership finance managers may give borrowers with poor credit is the ability to roll the payments for a credit disability insurance premium or credit life insurance policy into their auto loan. Credit life and disability insurance is a personal choice when applying for car loans with bad credit. If you're considering these options it's a good idea to know the benefits and disadvantages and to know if the coverage is truly necessary rolled into your auto loan. Here's what we know.
Protecting a Car Loan
Many of the decisions that you have to make when purchasing a new or used car are not always cut and dried, no matter if you have good credit or you plan on financing a bad credit car loan. But even when a person who is credit-challenged decides to apply for car loans with bad credit and gets approved, there are often other choices that have to be made, not the least of which is deciding whether or not to sign up for credit life and/or credit disability insurance.
Finance managers at car dealerships sometimes refer to it as part of "fully protecting" an auto loan when they speak with borrowers including those with damaged credit. That description is fairly accurate and before making a decision consumers should have a basic understanding of how credit disability insurance works.
Here at Auto Credit Express, we know this kind of information is helpful because for more than twenty years we've been assisting car shoppers with bad credit who are looking for online auto loans to find those dealers that can offer them a real chance for auto loan approvals.
Credit Life Insurance
Credit life insurance is a type of decreasing-term life insurance. Term insurance is an insurance policy that is in force for a fixed period of time and cannot be renewed. Unlike a whole life policy, it builds no cash value.
A decreasing-term policy means that the policy is designed to match whatever the loan balance is at any point during the loan term. As the loan is paid off, the balance decreases and the amount of insurance covering the loan balance decreases to match the amount owed.
If you want credit life insurance as part of your bad credit auto loan, you have to buy it at the time you sign the loan documents. The monthly premium is based on the original loan balance and the cost is added to the finance contract and included in the monthly car payment.
Pros & Cons of Credit Life Insurance
Like disability insurance, you'll have to decide if credit life insurance is worth the cost. Here are some facts:
- Peace of mind – credit life insurance will pay off your car and your estate won't be responsible for the loan balance or loan payments if you should die before the loan contract is paid off
- One payment – the life insurance payment is part of your car payment, so there is no separate premium you'll need to pay.
- Cost – as a rule, credit life insurance is usually more expensive than if you were to take out an individual term life insurance policy for the loan amount.
- Interest payments – because it's part of a loan, you're paying interest on the cost of the policy every month.
- If you're single – if there is no cosigner on the loan and you're single, even if you were to die your family is not legally responsible for the loan balance.
Credit Disability Insurance
Finance managers usually call it "credit disability" and it's essentially a health insurance policy that can be added to an auto finance contract. Unlike credit life insurance which only benefits the lender, credit disability insurance offers advantages to both the lender and the buyer as it will take responsibility for making the monthly payments to the lender if the borrower becomes sick or disabled and is unable to work.
Also known as accident and health insurance, credit disability insurance is designed to provide funds for your car payments if you should become disabled to the point where you are unable to work and takes effect once you are disabled by sickness or injury.
Depending on the type of policy, the waiting period for benefits begins anywhere from 14 days to up to 90 days from the date your disability begins. Once you have satisfied the waiting period, the policy begins making your car payment. In most cases, the benefit is retroactive to the first day of disability, although this is not always the case. In addition, you do not need to be permanently disabled in order to receive benefits from these policies.
If they want the cost included in their car payment, borrowers must decide whether or not to get credit disability insurance before any loan documents are signed. The monthly cost is based on the initial loan balance and is added to the amount financed. This means that the monthly car payment will also increase, reflecting the added cost.
Pros & Cons of Credit Disability Insurance
Like any other loan option such as credit life insurance, only the borrower can decide if they need this coverage. Here are a few points to consider:
- Peace of mind – Your car payments will be made if you become either temporarily (coverage varies) or permanently disabled.
- One payment – The insurance premium is part of the car payment so there is no additional monthly bill to pay.
- Not tied to FICO scores – Unlike some insurance policies, low credit scores are no problem and won't raise the cost of credit disability insurance.
- Cost – Coverage can be more expensive than a stand-alone individual disability insurance policy.
- Interest charges – Since it's rolled into the loan, interest is added to the cost of the premium every month – not the case with a separate disability policy.
- Conditions – Some policies will not pay if there is a pre-existing condition (a health-related problem diagnosed within 6 months of your application for coverage).
- Alternate coverage – Some borrowers may already be covered or eligible for some type of disability coverage through their employers.
The Bottom Line
The decision to carry credit life insurance or credit disability insurance on a bad credit auto loan is one that you will have to make. If you have a family or a cosigner and you're worried that they might not be able to make payments, you might want to first look at the costs of an individual term life insurance policy before you sign on the dotted line. Consumers with poor credit who are concerned that they might not be able to make loan payments if they become disabled should first check their insurability as well as the cost of a stand-alone disability policy before signing up for one whose cost will be rolled into an auto loan.