Before you borrow money, always put a budget and make sure you have room in your finances to repay the loan. Of course, when you set the budget, you have to base your current income and expenses on making some extra air for unforeseen events.
However, sometimes your budget may change markedly before you have reached out to pay off the loan, and then the budget may go ahead despite good planning.
Consequences for your finances
Unfortunate events such as unemployment and illness are not only tragic for your life, your family and your everyday life – they also have a major impact on your finances. When you go drastically into income, for example because you lose your work, repayments and interest on a loan can be just what makes the economy go.
Losing the ability to pay off your loans can be very expensive. When you do not pay your installments in due time, extra interest will come on the loan and your debt will grow. If you do not collect your installments, you may eventually be registered with the RKI.
Unemployment can therefore have major consequences for your economy, even though you may only be affected for a short period. Similarly, illness can become an economic tragedy because it takes time to reorganize its economy to the new circumstances. It can be extra stressful in a difficult time.
How loan insurance works
A loan insurance typically covers the repayments on your loan if you were to lose your job, become incapacitated due to illness, or if you or your co-worker dies.
Please note that some insurance cover only in case of death, while others also cover involuntary unemployment. The insurance can also vary according to whether they cover both interest and repayments. If they only cover your installments, you must continue to pay the interest on your loan yourself.
In many cases, the insurance only covers a period of eg 30 or 60 days. This is called a body period.
Therefore, always read the insurance conditions carefully.
Basically, the best advice is to put in a realistic budget, with room for unforeseen changes before borrowing money. However, some changes, such as unemployment, are so large and difficult to predict that they can be difficult to plan out of – and then insurance can be a good idea.
Read here about consumer economics’ good advice for the unemployed.
An extra cost for security
The price of the insurance depends on both the size of the amount you borrow and the duration of the loan. It is more expensive to insure large loan amounts than small loan amounts, and it is also more expensive to insure a loan that runs over many years than a loan you pay quickly.
You pay for security
When you insure your loan, there is an additional expense on top of the monthly loan costs. This means that the total cost of the loan increases. However, it can be worth the money if you were to be unlucky and end up in a situation where you cannot repay the loan.
Whether it is a good idea to buy insurance when borrowing money depends entirely on your personal situation and your temperament. You can best assess the risk of unemployment or illness yourself, although accidents can by nature never be predicted.
Also think about what the extra security is worth to you. If you worry about your future and finances, it can be worth the money to buy the security an insurance gives when you borrow money
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