Do I need insurance for a personal loan?

Do I need insurance for a personal loan?

Taking out a personal loan can be a big commitment, and it may take several years to pay off depending on your loan term. So, you might wonder if it’s necessary to take out insurance to cover yourself in the case of unexpected loss of income.

Consumer credit insurance (CCI) is a type of add-on insurance typically offered by lenders to protect credit borrowers if/when they are faced with an unexpected life event that prevents them from making their repayments – such as an accident, illness, involuntary unemployment, or death.

While it’s never a bad idea to be thinking about how to protect yourself and your finances should something unavoidable occur, when it comes to insurance, it’s always worth considering whether the benefits truly outweigh the cost. 

Sometimes consumers may take out insurance for peace of mind but come to find that there are a substantial number of circumstances in which they aren’t able to make a claim. Unfortunately, it’s often once they are in a position where they need to make a claim that they come to the realisation that they may not be eligible.

In fact, the Australian Securities and Investments Commission’s (ASIC) 2019 review of the sale of CCI by 11 major banks and other lenders found that it is “extremely poor value for money”.

According to the review, across all CCI products sold by lenders, consumers received only 19 cents in claims for every dollar paid in premiums.

Subsequent to these findings, all of the big four banks have ceased their personal loan protection insurance (a CCI product available specifically to personal loan borrowers) offerings for new customers.

There are some finance companies that may still offer some forms of CCI or loan protection insurance, but if you’re still looking for this kind of insurance, be sure to do your due diligence before purchasing a policy.

Questions to ask before taking out an insurance policy

Before taking out any kind of insurance policy, it’s important to have a good understanding of what it covers, so you can make an informed decision of whether or not it’s worth it to you.

Consider asking the insurance provider the following questions about the policy:

  • What does it cover?
  • What are the exclusions?
  • Are there any claim payment caps and/or limits?
  • Am I covered under my current employment contract?
  • What happens if my employment contract changes?
  • What is the total cost of the policy?

What other help is available?

If you find yourself in a position where you are unable to make your loan repayments, and either you don’t have insurance or your insurance policy won’t cover you, remember that help is available.

Consider reaching out to your credit provider, as they may be able to offer financial hardship assistance. 

Additionally, the National Debt Helpline offers free financial counselling that can help you get back on track.

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Learn more about personal loans

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can I get a personal loan if I receive Centrelink payments?

It is hard, but not impossible, to qualify for a personal loan if you receive Centrelink payments.

Some lenders won’t lend money to people who are on welfare. However, other lenders will simply consider Centrelink payments as another factor to weigh up when they assess a person’s capacity to repay a loan. You should check with any prospective lender about their criteria before making a personal loan application.

What are the pros and cons of personal loans?

The advantages of personal loans are that they’re easier to obtain than mortgages and usually have lower interest rates than credit cards.

One disadvantage with personal loans is that you have to go through a formal application process, unlike when you borrow money on your credit card. Another disadvantage is that you’ll be charged a higher interest rate than if you borrowed the money as part of a mortgage.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

How long do personal loans take?

Depending on the lender, some personal loan applications can be approved in as little as one hour, or you may need to wait until the next business day. If approved, you may receive your money on the same day, the next business day, or within the week.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

When was comprehensive credit reporting introduced?

Comprehensive credit reporting was introduced to make credit reports fairer and more accurate. Under the previous system, credit providers only saw negative information about potential borrowers. Now, they're able to see both positive and negative information, which means that credit providers can see if a borrower’s negative credit behaviour is consistent or a mere one-off.

What is comprehensive credit reporting?

Comprehensive credit reporting is a system which includes both positive and negative information on a person’s credit file. Before comprehensive credit reporting was introduced, only negative information was included.

What is a secured bad credit personal loan?

A bad credit personal loan is 'secured' when the borrower offers up an asset, such as a car or jewellery, as collateral or security. If the borrower fails to repay the loan, the lender can then seize the asset to recoup its losses.