For most of us, buying a car is the second largest financial transaction we will make, next to buying a home. And we are likely to get loans to finance our auto purchase. In the fourth quarter of 2014, 84 percent of new cars purchased were funded, according to Experian Automotive.
If you are financing your car purchase through a dealer, the finance and insurance manager is also likely to offer you warranty and insurance products, such as extended warranty, difference insurance or tire and wheel protection. The F & I manager can also offer credit protection, which is meant to cover the payments of your car if you can not pay for themselves due to dismissal, injury, illness or death.
The most venerable of these products, with almost 100 years of history, is credit insurance. Consumer groups have long distrusted credit insurance products, which are offered not only for cars, but also for credit cards and other consumer loans. Often, consumer groups claim, products are expensive and unnecessary. In addition, there have been cases of lenders forcing credit insurance to consumers.
Chris Kukla, senior vice president of the Center for Responsible Lending, is a non-profit, nonprofit, consumer credit organization based in Durham, North Carolina. In addition, he says, credit insurance policies are "plagued with exclusions."
Payment rates (premium dollars paid compared to the amount paid on claims) are often low. That's because the money goes to commissions, he says.
There are some decent credit insurance providers, such as credit unions, says Kukla, but it is difficult for consumers to know what products are worth and what are scams. To protect themselves, potential buyers should seek the coverage they can afford which specifically addresses their financial concerns and which comes from a reputed insurer. The insurance department in your state is the place to check in order to see that the company is licensed and legitimate, says automotive expert Lauren Fix.
The three most common types of credit insurance coverage are:
Credit Life: This pays all or part of your loan if you die during the time it is covered.
Credit Disability: pays for the loan if you become ill or injured and can not work for the time it is covered. It is also sometimes called credit accident and health insurance.
Involuntary Unemployment Credit: Pay a certain number of monthly loan payments if you lose your job without any fault of yours, such as a layoff, during the coverage period. It is also known as "involuntary loss of income" insurance.
None of these coverages are required with a car loan. You can not be denied credit if you say no to a credit insurance offer, says Kukla.
Payment protection: a product
more recent A more recent type of credit protection is called debt protection, which could also go by such names as debt cancellation, debt suspension or protection of payment. Federal law allows national banks, most state banks, and credit unions to offer this benefit without involving an insurer. The bank or credit union fills that role.
Debt protection provides benefits similar to credit insurance. It is usually offered when you sign your loan documents.
A New Approach: The Walkaway Program
The Great Recession of 2007-'09 had a devastating impact on consumers and drove car buying into a near deadlock. Who could feel comfortable buying a new car if there was a good chance that you would lose your job tomorrow? The recession has had "a big impact on the psyche of the car-buying public," says Steve Klees, senior vice president of the EFG Companies in Irving, Texas.
In the midst of the recession, EFG partnered with Hyundai to offer the Hyundai Assurance program, presented to consumers during the 2009 Super Bowl. It offered people the peace of mind of buying that new car. If you lost your job within one year of purchasing your new Hyundai, the automaker promised, it would take the car back. By the end of the program in 2011, 350 people had returned their vehicles.
While Hyundai Assurance is gone, EFG makes available a similar product, called Walkaway, which is available through 350-400 dealerships, banks and credit unions across the country. When an involuntary loss of work or other triggering event occurs, the program frees customers from a lease or loan obligation
