Loan Protection; A Blessing or a Curse?

Many people don't know whether they are protected by the law when they take out a loan.

The Consumer Credit Act 1974 governs secured and unsecured personal loans.

There are strict regulations in this Act regarding the way in which money is lent. The Act covers unsecured loans, known as 'regulated loans,' up to a value of £25,000.

The credit agreement, which you will sign when you take out the loan, will legally bind you to the terms of the agreement. Should you get into difficulties with repayments, don't bury your head in the sand, discuss the situation with your lender immediately. Almost invariably it is possible to reschedule your repayments, although you may incur a financial penalty for this facility.

The worst thing you can do is to ignore the problem, as things will catch up with you in the end. Your credit record will be effected if you miss monthly repayments, which results in an impaired credit history. You will then receive a frosty reception if you apply for another loan.

There is a way of protecting yourself against unforeseen events, which may affect your ability to keep up with repayments....loan protection insurance.

However, before signing up for a policy of this kind, there are a number of issues you should consider. Firstly make sure that you are being offered a policy that suits your specific needs. For example, the terms may state that you are unable to claim for up to a period of 60 days from the time you became sick or lost your job.

You have to be careful, as even working for a single day may render your policy invalid. So forget about picking up extra cash with a temporary job and be particularly cautious if you are on a fixed term contract or are self employed as the devil may be in the small print of your agreement. You may discover that you are not covered if your employer fails to renew your contract or your self employed work grinds to a halt.

Even falling ill or being unable to work may not be covered by your policy.

Unfortunately banks tend to be uneconomical with the truth when discussing the terms of a policy, but will have no qualms about highlighting the small print when you come to make a claim.

A typical loan protection policy may offer the following....

The maximum monthly payment is linked to your income. Typically it may be 75% of your income if you become ill, suffer an accident or are unemployed.

Age-related loan payment protection insurance gives exceptionally low cost cover to young and middle-aged people who want to protect their loan repayments against being unable to work due to illness, injury or involuntary unemployment. The cost is based on the monthly loan payment you want to cover and your age at the outset - premiums do not rise as you grow older. Claim payments are received if you have been off work for 30 consecutive days and are backdated to day one, with a maximum of 12 months payments.