When you take out a loan or buy a car, you will often be encouraged to take out credit life which is an insurance to settle the loan should you die, become disabled or lose your job. While credit life has its place it can be abused and consumers need to understand their rights.
Credit life can be a useful insurance as it settles your loan if something happens to you, unfortunately however unscrupulous lenders are using it to circumvent the limit on fees and interest placed on them by the National Credit Act. Ian Wason, CEO of debt counselling company DebtBusters says he is coming across many cases where micro-lenders are charging exorbitant premiums for the insurance. In some cases credit providers are committing fraud by selling fake policies (See The insurance rip-off)
The problem is that the credit providers often prey on people who are already in financial difficulty and may not qualify for loans from better known institutions and these credit providers may threaten not to provide the loan if you do not take out the insurance. In desperation people accept the deal, however at those insurance premium levels the client will just fall further into debt.
Wason says he also finds that often people do not realise that they can claim against their insurance policy if they are retrenched. They renegade on their debt repayments or tap into their savings to pay off the debts when they could claim from their insurance.
Before signing up for an insurance policy do your homework first. Credit life through the banks or larger insurers can be cheaper than taking out individual insurance if you have a health risk or you are more than 40 years old as it does not require underwriting; however it can be more expensive if you are younger and in good health. In this case you may be better off taking out an individual policy which rewards you for being a lower risk client.
Know your rights
It is important to know that according to the National Credit Act you are not required to take out credit life through the credit provider and you are entitled to shop around for a better rate. You are also entitled to use existing life cover or funeral cover you already have to meet your credit provider’s requirement. In some cases micro-lenders sell funeral cover as a form of credit life for smaller loans however this does not provide cover for disability or retrenchment.
There have been reports of unscrupulous car dealerships stating that your loan will not be approved without credit life; however this is not the case. WesBank, the vehicle financing arm of FNB, says that “while we afford consumers the opportunity to include this policy on their vehicle finance agreements, in no way does this form part of our criteria for the approval of vehicle finance, as this is not mandatory”.
If you challenge your credit provider and state that you will shop around for insurance and they will not approve the loan on that basis; then report them to the National Credit Regulator.
Know the rates
For personal loans, credit life premiums should not exceed R4 per R1000 of cover. The rate can vary depending on the size of the loan from R2 to R4 per R1000, however if you receive a quote of R4 per R1000 or more, then you should definitely shop around. You can calculate the rate you are being charged by dividing the loan amount by 1000 and then dividing the premium by this amount. For example if the loan amount is R10 000 and the premium is R30 then divide R10 000/1000 = 10 then divide the premium R30/10 = R3 per R1000 of cover.
Larger loans like car finance tend to have much lower rates. According to MiWay insurance, for credit life on a car loan, they would charge between R100 to R150 per month for R150 000 worth of cover which works out at R1 – R1.50 per R1000
This article by Maya Fisher-French first appeared in City Press on 18 September 2011