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There’s no denying that buying a car is an expensive purchase. It doesn’t matter whether it costs $2,000 or $200,000, a car carries a hefty sum that most buyers have to finance into monthly payments for years. As such, the next time you buy a car from a dealership and have to meet with the finance manager, they might try and sell you credit insurance. But what is credit insurance and is it worth buying?

What is credit insurance?

New Toyota cars parked at a dealership in August 2021 in Edmonton, Alberta, Canada
New Toyota cars on a dealership lot | Artur Widak/NurPhoto via Getty Images

Credit insurance gives you protection from missed payments on your loan in the event that you become unemployed, disabled, or unexpectedly pass away. Credit Karma reports that credit insurance is offered on more than just auto loans and buyers can buy insurance for their mortgages, personal loans, and even credit cards.

The main point of getting credit insurance for an auto loan is that you’ll be covered in the event that you can longer make the monthly payments to your specified lender. Considering auto loans typically have hefty monthly payments, the thought is that it could be advantageous to get insurance for the loan to ensure that it gets paid.

How credit insurance works

customers sitting a car salesperson's desk
A car salesman talks to a customer from behind a protective screen at Motorpoint showroom in Oldbury, West Midlands, as car showrooms open for the first time since lockdown, as part of a wider easing of restrictions in England. | (Jacob King/PA Images via Getty Images)

In the event that you can no longer pay for your auto loan, then the credit insurance will kick in and cover the monthly payments. However, a finance manager might offer you three different types of credit insurance for your auto loan:

  • Credit life: The loan is paid in the event of your untimely death
  • Credit involuntary unemployment: The insurance makes a limited amount of monthly payments to the lender if you lose your job not from your own fault. (i.e. layoff)
  • Credit disability: The insurance makes a limited amount of payments to the lender if you become disabled.

When credit insurance is offered to you, you might think its sounds like a good idea for the “just in case.” However, the cost of this type of insurance can outweigh the benefits, especially if you’re paying for it monthly.

The major con of buying credit insurance

A car salesperson talks to a couple of customers about the Audi TT.
A car salesperson talks to a couple of customers about the Audi TT. | (Yavuz Arslan/ullstein bild via Getty Images)

Before you sign up for credit insurance, there is one important factor to consider: You’re essentially paying extra money to assure that the lender is guaranteed to get paid should something happen to you. In a way, the lender doesn’t care if you live and make payments or die and have the insurance cover the loan. Either way, the lender will get paid and you won’t reap any of the benefits from the money that you put into the loan or the insurance policy.

Also, if you end up making all of the auto loan payments and live to enjoy your car, then you would have signed up for credit insurance for no reason.

Is credit insurance a scam?

No, but it is a scam if the finance manager forces you to sign up for credit insurance or somehow includes it in the loan documents. The Federal Trade Commission ruled that it’s illegal for a lender to automatically include credit insurance in your loan without notifying you, so be sure to read over the documents before signing anything.

Ultimately, it’s not really worth it to buy credit insurance if you already have a life insurance policy or disability insurance put in place. Credit Karma also noted that those insurances should be able to cover your expenses and will likely cost less than credit insurance. If you don’t have life insurance or disability, then it could make sense for your to sign up for credit insurance, however, just make sure that it’s affordable and make sense for your particular situation.


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