Credit protection – how are loans secured?
The loan must be secured for a larger investment. Even with the best planning, unpredictable events can occur. This makes repayment of the loan more difficult, sometimes even impossible. Unemployment, illness or even the death of the borrower can upset financial planning. Therefore, credit protection is important, the current installments or the total amount are paid. This credit protection is usually in the form of insurance.
The residual debt insurance
If the debtor can no longer pay, the residual debt insurance takes effect. This insurance company now takes over the outstanding payments. However, certain conditions have to be met here, sometimes the amount can be limited to a certain amount and sometimes there are maximum payment periods.
The residual debt insurance is like a lifeline that helps in an emergency. Not only does it offer security to the borrower, the banks also attach great importance to taking out this insurance. Sometimes it is even a prerequisite for a loan.
However, residual debt insurance also has disadvantages; you cannot blindly sign it. This insurance is often restricted and the costs are quite high. In the event of death, the monthly payments or the total amount can be capped. One should also thank that the loan is paid off and the loan amount decreases over time.
The insurance must therefore be adaptable. The small print is also important if you are unable to work; certain illnesses could be excluded. The same applies to unemployment, unemployment must be through no fault of your own and the insurance usually only pays for 12-18 months.
Is this insurance necessary at all?
That depends very much on how the borrower is insured. Other insurance companies can also cover the risk. Risk life insurance is not expensive and in the event of death, the surviving dependents have sufficient capital to pay the loan. Even in the event of unemployment, there are sensible alternatives to residual debt insurance. Temporary unemployment can be offset through reserves and the loan can still be serviced.