Credit Insurance
Insurance that pays off or makes payments on a loan or credit obligation if the borrower becomes unable to pay due to death, disability, unemployment, or other covered circumstances. It protects both the borrower and lender from default risk.
Example
“After being laid off, Jennifer was relieved that her credit insurance covered her car loan payments for six months while she searched for new employment.”
Memory Tip
Credit insurance is like a safety net for your Credit - it Catches you when you Can't make payments.
Why It Matters
Credit insurance protects borrowers from having their credit damaged by missed payments during financial hardship and prevents the loss of financed assets like homes or cars. It also protects family members from inheriting debt obligations they cannot afford.
Common Misconception
Some people think credit insurance is always a good deal or that it's required for loans, when in fact it's optional and often expensive relative to the protection provided. Others believe it covers any reason for non-payment, but policies typically have specific covered events and exclusions.
In Practice
Mike takes out a $25,000 auto loan with optional credit insurance costing $45 per month. Two years later, he suffers a disability that prevents him from working for eight months. His credit insurance pays his $485 monthly car payments during this period, covering $3,880 in payments. Without this coverage, he would have faced potential repossession and credit damage, plus still owed the remaining $15,000 loan balance.
Etymology
Emerged in the early 20th century as consumer lending expanded, combining credit industry terminology with insurance principles to protect both borrowers and lenders from payment defaults.
Common Misspellings
Compare insurance quotes and save
Related Terms
More in insurance
Other insurance terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.