A personal loan is a blessing in times of financial crunch, but it is also a responsibility till the loan is repaid in full. Many unexpected situations in life like loss of a job, accident or deterioration of health may make it difficult for the borrower to pay the monthly instalments of the personal loan. A personal loan insurance comes in handy in case of such situations. It protects the borrower’s monthly EMIs in case of occurrence of such unfortunate events. It saves the family of the borrower from bearing the burden of the outstanding loan amount.
Banks who offer personal loans themselves have a tie up with the insurance companies. These insurance covers offset the risk of the inability of the borrower to repay the loan. Like any other insurance plan a premium amount needs to be paid. Though the exact amount varies from bank to bank, it mainly depends upon the loan amount and the repayment period. The entire premium amount can be paid upfront or along with the loan EMIs.
There are certain factors that you must keep in mind before taking a personal loan insurance.
Affordability- An extra premium amount adds to your overall expenditure and the cost of the personal loan. You need to decide whether it is financially viable to pay the entire premium amount upfront or in instalments along with the EMI. If you wish to pay in instalments make sure that your monthly budget has room for the premium amount.
Not compulsory- Though most banks that offer personal loans try to sell the insurance product it is not at all mandatory for the borrowers. One is free to decide whether he needs the insurance cover or not. For example if one has a life insurance cover of a substantially big amount, taking a separate personal loan insurance will not make sense.
Weigh different options- After a comparison of different personal loan offers borrowers usually ignore the fact that they need to weigh the insurance plans offers too in order to choose the best option. They make an instant last minute purchase of whatever plan the bank suggests. But buying a plan without doing your homework may turn out to be costly affair. The premium rate may be higher than other alternative options. The terms and conditions associated with it might not be the most favourable. For example if the plan does not cover certain situations like a job loss you will not benefit from the insurance in case of such an event. Make sure you understand what the insurance covers and what it doesn’t, including temporary or permanent disability, accidental or natural death etc.
Foreclosure clause- If you foreclose the loan before the tenure ends, you lose the protection offered by the insurance. Find out whether you will get a refund of the premium amount, if you had paid the entire amount upfront.
The personal loan interest rate as well as the premium on the insurance depends on the credit health of the borrower. If a person has a very good credit history, the rates will be less. But if the borrower has taken a personal loan with low CIBIL score, it will be a costly deal as both the insurance as well as premium amount will be high.
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