Will claiming loan insurance damage my credit rating?
Keeping on top of your debt repayments is important. Missing a payment could leave a mark on your credit history, making obtaining further credit more difficult in the future (with records remaining visible for six years).
With that in mind, it makes good sense to prepare for any unexpected emergencies that could stop you from making repayments and damaging your credit rating.
Loan insurance (also known as payment protection insurance) is one way of doing that. It can ensure that if you can't afford your repayments because of a change to your financial circumstances, your payments will continue to be covered (provided you meet qualifying claim criteria, such as redundancy, ill health, etc.).
Claiming on loan insurance therefore won't affect your credit rating - providing the insurance company settles your claim promptly and the payments are still made on time.
When potential lenders view your credit history, all they can see is whether or not your payments have been met. It doesn't matter whether your repayments have been made by you or come from an insurance payout - as long as you're up-to-date, your credit rating should remain intact.
Types of loan insurance
On a basic level, loan insurance is quite simply an insurance policy that helps to protect you against the impact of a change to your financial circumstances by covering the payments you might otherwise be unable to afford (as long as you meet the qualifying claim criteria). You can normally buy this protection from your lender when you take out your loan, although this might not be your cheapest option - so it's often worth shopping around.
There are other types of insurance that could help with loan repayments, too:
Mortgage payment insurance
Mortgage payment insurance works in much the same way as typical loan insurance, but it specifically applies to mortgage payments. It's sometimes possible to purchase more than 100% cover - for example, 125% - and that extra 25% cover could be used to help repay loans or other financial commitments, such as utility bills.
Because your mortgage is a secured loan, payment protection insurance could be especially important, because failing to meet your payments could result in you losing your home.
Critical illness cover
Critical illness cover isn't a type of loan insurance, but is more likely to be insurance against a loss of income, so it could help to cover your lost income if you become seriously ill. This could be especially important if illness forces you to leave work, or if you have to pay for expensive treatment. Again, be aware that for a claim to be successful, you will have to meet qualifying criteria.
When would I qualify for a loan insurance claim?
Typically, you could be eligible to claim if you had been made redundant or had been unable to work due to an illness or accident - assuming of course that you met all other qualifying criteria.
On the other hand, if you were dismissed from your job, or became ill with a medical condition that you already knew you had, you probably wouldn't be able to make a claim (and therefore you wouldn't receive a payout).
The exact terms vary between different insurers and policies, so make sure you check the terms thoroughly and ensure you understand any exclusions before you commit to purchasing a policy.
Related resources:
- Insurance
- Mortgages
- Loans
- Help with credit rating
- Is debt consolidation bad for your credit rating?
- How will a debt management plan affect my credit rating?
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Tags: loan, loans, loan insurance, payment protection insurance, PPI, mortgage, mortgage repayments, mortgage payment protection insurance, debt, repayments, credit, credit history, credit rating, critical illness cover