If you're reading this, you may be one of thousands of Americans who find themselves in the position of having to finance their next car with a bad credit auto loan. Here at Auto Credit Express, we've spent more than two decades helping car buyers with bad credit scores who are looking for online auto loans. We help locate those dealers with the lending resources for their best chances at auto loan approvals.
When you have poor credit and you're closing the deal on an auto loan, one option dealership finance managers may offer borrowers is the ability to roll a credit life insurance premium into their car loan. If you plan on financing your next vehicle with auto loans for bad credit you should know what credit life insurance is and if you really need it
Credit Life Insurance for Car loans
Although this topic is not as much of a hot button as service contracts, it really should be. Credit life insurance is a form of term life insurance. It makes sure that a dealership or lender will get the loan paid off if something happens to you. Credit life insurance also protects any co-borrowers or heirs from being responsible for the loan debt if you're unable to continue to make payments due to death.
Term insurance is an insurance policy that is in force for a fixed period of time and cannot be renewed. It is also a form of life insurance that builds no cash value.
In addition to being a term life policy, credit life insurance is also what is known as a “decreasing” term policy. This means that the policy is designed to cover the amount of the loan. As the loan is paid off, the loan balance decreases and the amount of life insurance also decreases to match the amount owed on the loan contract.
Finance managers call it "credit life" and it's essentially a decreasing term life insurance policy that can be added to a car finance contract that, in actuality, benefits the lender.
Unlike the auto insurance policies in some states, the cost of credit life insurance is not affected by the insured's FICO scores while, in some states, age limitations are placed on which borrowers can and cannot take out a policy, so this is only an option for a select group of borrowers.
Buying Credit Life Insurance for Car Loans
Borrowers must make a decision about credit life insurance before the loan documents are signed. While we feel that only the borrowers themselves can decide if they need credit life insurance, here are some pros and cons to consider:
- Peace of mind – If a borrower should die before the loan is paid off, the insurance coverage will pay the remaining balance, and their estate won't be responsible for any balance due. In fact, the title to the vehicle will be transferred free and clear to the borrower's estate.
- Convenience – Since the cost of the insurance is included in the car payment, there is no additional premium that needs to be paid.
- Guaranteed – Borrowers not insurable through regular channels can protect their families from additional debt if they were to die.
- Cost – Credit life insurance is usually more expensive to buy than a comparable decreasing-term life policy. The reason for this is that there's a greater risk with credit life insurance because it's a guaranteed issue product – eligibility is based solely on the policyholder's status as a borrower. There are no medical exams or health questions involved. Borrowers are also paying the same premium for less protection each month.
- Interest expense – Because the cost of insurance is added to the loan, interest is also being charged on the cost of the policy.
- Single borrowers – If there is no co-signer and the borrower is single, even if the borrower were to pass away their family could not be held responsible for the loan balance.
How to get Credit Life Insurance for Car Loans
If you decide to buy credit life insurance, you usually have to do it at the same time you take out your car loan. The monthly premiums are based upon the original loan balance and the cost of the policy is added to the finance contract and the additional amount is added to and becomes part of your monthly car payment.
Beware of scams
In most states, a lender can't require you to buy credit life insurance in order to be approved for a loan. If the car salesman insists this is the case, check with your state insurance commissioner before signing on the dotted line. In most cases, you are also allowed to cancel the insurance at any time during the term of the contract. Sometimes this results in a lower monthly payment, although in many cases either the amount is refunded to you at the end of the contract in the form of a pro-rated payment or an earlier payoff date.
As part of our business at Auto Credit Express, we have helped thousands of applicants raise their credit scores and reestablish their car credit by filling out our online car loans with bad credit loan applications and financing a vehicle with a bad credit car loan through one of our affiliate dealers. By paying off the loan on time, these buyers have a good chance of starting a new chapter in their lives.
The alternative, buying a vehicle from a Tote the Note, We Finance Everyone car dealer, can be a problem because these dealers don't report payments to any of the credit bureaus. On the other hand, taking out a loan with a bad credit lender and choosing a vehicle that's too expensive can also create problems since this can stretch your budget and even result in repossession.
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.
Consumers with problem credit who are concerned that their families or co-signers might not have the ability to make loan payments should first check their insurability and the costs of a decreasing term life insurance policy before signing up for a policy whose cost will be rolled into an auto loan.