Understanding personal loan insurance cover

Understanding personal loan insurance cover

A personal loan can help you when you need money to buy a car, take a holiday, or renovate your home. Like other loans, you need to make regular repayments and repay the total loan amount in a timely fashion to avoid any negative impact on your credit score. You may wonder what your options are if you’re unable to meet the repayment timelines due to uncontrollable circumstances. One option could be taking out a personal loan insurance policy, so it’s good to know how it can help in this situation.

One reason you may struggle to make your repayments is if you’re unable to continue working. Whether this is due to an illness or an accidental injury, or if you lose your job. Personal loan protection insurance can help you to cover the repayments. 

Is it mandatory to take insurance for a personal loan? No, but it can safeguard you against unforeseen situations that may affect your ability to make timely repayments. You can buy a personal loan protection policy either when you take the loan or later.

What does personal loan protection insurance cover?

What is covered varies based on the type of policy and your situation. Some of the typical issues that will be covered in the policy include: 

  • Loss of income: If an accident, injury or a severe ailment affects your earning capability. The policy may offer assistance until the loan is repaid or for a set period, or until you resume work.
  • Loss of employment: If you lose your job, you can file a claim for assistance under this policy. However, the policy benefits are not available if you resign or accept voluntary retirement or redundancy.
  • Loss of life: Some insurance policies may repay the outstanding balance of your personal loan if you suddenly die, saving your family from a load of debt.

Check the policy’s product disclosure statement (PDS) to know more about the terms and conditions specific to the policy you’re looking at purchasing.

Are there any eligibility criteria?

Like any other insurance policy or financial product, there are eligibility criteria you will need to fulfil before applying for a policy. Some of these include your age, type of employment, and residential details. Insurers may also have other requirements if you need personal loan insurance cover for a larger loan amount, usually exceeding $20,000. Some financial institutions may offer this insurance only if you also take out the personal loan with them. You can check with your lenders to understand more about the eligibility criteria for a personal loan protection insurance policy.

What is the cost of a personal loan protection insurance policy?

Personal loan insurance costs are calculated on several factors. These include the type of cover, the loan amount and its duration, the monthly repayments of the loan, your age, and if it is in a single name or jointly held.

Is there a waiting period?

There may be a waiting period, depending on the policy, between its start date and the time when you can file a claim. There might also be a period in which you have to wait after you become unwell or are injured or lose your employment before you can file a claim.

Some providers offer a cooling-off period, during which you can cancel the policy and receive a refund of the premium you’ve already paid. If you cancel the policy after the cooling-off period, the insurer may not refund the entire premium amount.

What are some benefits of a personal loan protection policy?

If you’re unable to work, you can feel good knowing that your loan will be repaid, which gives you and your family complete peace of mind. A personal loan protection policy also provides financial protection to your family in case of your untimely death.

If you’ve taken out a personal loan, and fail to make repayments, your credit score suffers. With a personal loan protection policy, you’re able to continue making timely repayments even when you’re unable to work which safeguards your credit history.

A personal loan protection insurance policy can be purchased from your lender when you take out your loan or from an alternate insurer. It’s best to make sure you understand what is personal loan insurance before you decide to purchase a policy. The best way to get a better understanding of the policy is to read the PDS carefully and research various options to find the best deal for maximum benefits.

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Learn more about personal loans

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.

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.

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.

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.

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.

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.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

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.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

Does refinancing a personal loan hurt your credit score?

Personal loan refinancing means taking out a new loan with more desirable terms in order to access a more competitive interest rate, longer loan term, better features, or even to consolidate debts.

In some situations, refinancing a personal loan can improve your credit score, while in others, it may have a negative impact. If you refinance multiple loans by consolidating these into one loan, it could improve your credit score as you’ll have only one outstanding debt liability. Your credit may also improve if you consistently pay the instalments on time.

However, applying to refinance with multiple lenders could negatively affect your credit if your applications are rejected. Also, if you delay or default the repayment, your credit score reduces.

Is a personal loan a variable or fixed-rate loan?

Depending on the personal loan lender, you may be able to choose between a fixed and a variable interest rate. But, there are a few distinct differences between the two, so it’s important to weigh up the pros and cons before deciding on what’s right for you.

A fixed interest rate loan gets you the convenience of knowing exactly how much you need to repay each fortnight or month. On the other hand, you generally won’t be able to make lump sum or advanced payments to close your personal loan early - or at least not without a penalty.

With a variable interest rate personal loan, you may be able to get a longer loan repayment term, with the option of paying off the loan early. You typically won’t need to pay any additional charges for an early full repayment either. The potential disadvantage with an interest rate that can change is that your repayment is not entirely predictable, as it can fluctuate with the market. However, you’ll likely have more options as more lenders offer a variable interest rate personal loan.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.