What is credit insurance for an auto loan?

Credit insurance is optional insurance that make your auto payments to your lender in certain situations, such as if you die or become disabled.  When you are applying for your auto loan, you may be asked if you want to buy credit insurance.

Before deciding to buy credit insurance, think about your choices and about the cost of this insurance. If you add credit insurance to your loan, this increases your loan amount and you will pay additional interest. 

If you are considering credit insurance, make sure you understand the terms of the policy being offered. There are four main types of credit insurance:

  • Credit life insurance, which pays off all or some of your loan if you die
  • Credit disability insurance, also known as accident and health insurance, which makes payments on the loan if you become ill or injured and can't work
  • Involuntary unemployment insurance, also known as involuntary loss of income insurance, which makes your loan payments if you lose your job due to no fault of your own, such as a layoff
  • Credit property insurance, which protects personal property used to secure the loan – in the case of an auto loan this would be your car – if it is destroyed by events like theft, accident, or natural disasters

If a lender tells you that you'll only get the loan if you buy the optional credit insurance, you can submit a complaint to your state attorney general, your state insurance commissioner, or the Federal Trade Commission.

Tip

If you decide you need insurance, there may be cheaper ways for you to obtain coverage then to buy credit insurance and add it to your auto loan. For example, life insurance may be less expensive than credit life insurance and allow your family to pay off other expenses in addition to your auto loan.

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