Payday loan insurance is offered by lenders alongside payday loans. It offers financial protection to customers in the event of a missed repayment. It is not a legal requirement, but can offer useful support to a borrower if they face injury or sickness and have not earnt enough funds to repay back their loan on time.
According to Pew Trust, 12 million Americans take out payday loans each year. So it is not surprising that many may consider taking out insurance. With this in mind, Dollar Hand reveals further information on payday loan insurance, as well as the pros and cons of taking it out.
What Are Payday Loans?
Payday loans offer a short term way to borrow money quickly. If you face an urgent expense or financial emergency, then a payday loan can provide a quick injection of cash to help see you through until your next payday.
Common uses for payday loans include to pay for unexpected medical bills, car repairs, funeral costs, rent payments or wedding bills. They are not designed for frivolous spending such as drinking, partying or gambling. Payday loans should not be used to repay back other loans as this could lead to a cycle of debt down the line.
To qualify, applicants need to be aged over 18 years old and earn a steady income of approximately $800 each month. They also need a live checking account for the funds to be deposited into.
How Does Payday Loan Insurance Work?
As the name suggests, payday loan insurance is a product that lenders offer customers alongside a loan for repayment protection. Borrowers are covered in certain situations such as if you become unemployed or are unable to work and earn wages due to poor health, an injury or death. If a borrower fails to repay their loan on time due to one of these reasons, then the insurance covers the payments for them.
This means that they will not incur extra interest or late charges. It will also prevent their credit score from dropping which otherwise would make it much more difficult to borrow money or credit in the future.
It is not a legal requirement to purchase payday loan insurance and it is completely optional. Each borrower can consider the pros and cons of this product to decide whether insurance is the right choice for them.
What Are The Benefits of Payday Loan Insurance?
Payday loan insurance offers added security and reassurance that if you encounter an emergency situation, you will not have to face the repercussions if you can’t repay your payday loan on time. You will not have to worry about late fees or accrued interest.
Another key advantage is that it protects your credit score from decreasing in number due to unpaid debts. If you are unable to work and therefore do not earn enough money to repay your loan, then the insurance will meet the repayments for you. Likewise, if you pass away the payday loan insurance will pay off all or part of your loan so that you do not leave behind any debt.
What Are The Drawbacks of Payday Loan Insurance?
The main disadvantage of payday loan insurance is the cost. It can be quite expensive, and if the premium is financed as part of the loan you could end up paying more in interest. With this in mind, if you decide to purchase insurance then make sure that there are no hidden fees.
You could also look into other financial products such as income protection insurance or life insurance to see if this is more affordable. Just double check to make sure this offers the right type of cover.
What Should I Look Out For When Considering Payday Loan Insurance?
When considering payday loan insurance, check how much the premium will cost. If you are financing the premium as part of the loan, bear in mind that this will increase the loan amount and the interest on the loan. In this case, it is worth comparing how much lower your monthly repayments would be without the insurance to check how expensive it is going to be.
It is essential to read the terms and conditions of the policy carefully to find out exactly what is covered. Check what limits and exclusions apply on repayments, and whether the insurance will cover the full loan amount. Also find out what the cancellation policy is if you wish to terminate the insurance, and see whether you would get a refund.
It is important to remember that payday loan insurance is not compulsory. If a lender insists that you need insurance, then you should consider going with another provider instead. Lenders are not allowed to deny you money based on whether or not you choose to take out optional payday loan insurance.
You can also take out the insurance with a different company regardless of which lender you have borrowed money with. It is unethical for a lender to pressurize you into taking out the insurance with them. If they do, then you can consider reporting the lender to the FTC, your state insurance commissioner or state attorney general.
Is Payday Loan Insurance Right For Me?
Now that you are informed on the ins and outs of payday loan insurance, you can decide whether payday loan insurance is suitable for you. Consider your budget, your requirements and the charges involved, and weigh this against the chances that you are likely to be out of work and unable to repay back your loan on time.
Although the insurance works well for many, there are other products that you can consider. Weigh up the pros and cons before making a decision.
Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.