A residual debt insurance rarely makes sense. It pays, however, when borrowers of an installment loan can no longer repay their monthly installments temporarily or permanently. But it is very expensive and the contract inflexible. For consumers, therefore, it is more advisable to use a useful alternative to the residual debt insurance.
From the point of view of most banks, a residual debt insurance always makes sense. For this reason, when concluding an installment loan, the banks encourage their customers to take out residual debt insurance. No wonder: it serves the lender as security for failing repayments – for example, after the death of the borrower, during a period of unemployment or a prolonged illness. Despite this huge advantage for the bank, she can pay dearly for the supposedly meaningful residual debt insurance. Consumer centers are therefore alarming and advising borrowers to provide the bank with alternative collateral.
Remaining debt insurance is not sensible, but expensive
The Consumer Centers Hesse and Saxony have currently investigated whether a residual debt insurance makes sense. They come to the conclusion that the policies are altogether too expensive, too inflexible and not user-friendly. In the analysis of 108 tested cases in sales, they came to the conclusion that residual debt insurance for consumers usually does not make sense. The insurance initially increases the installment loan, which also increases interest rates. According to Eva Raabe, Senior Advisor at the Consumer Center Hesse, interest rates on installment loans and residual debt insurance often double – “sometimes to 20 percent or more. That borders on usury, “she tells the Deutschlandfunk.
In return, however, the borrower receives hardly any benefits. Thus, it would be assumed that the additional security for the bank is reflected in lower interest rates – Nil.
Remaining debt insurance: sensible alternatives
According to consumer protection research, many banks are forcing their customers to take out a residual debt insurance policy, also known as residual credit insurance. Borrowers are under no obligation to sign such a contract to obtain a loan. This even emerges from a court ruling by the Federal Court of Justice (ref .: IV ZR 289/13). Raabe expresses to Deutschlandfunk that “the consultants actually have to point out to customers that there are other possibilities “. For example, an already existing Bauspar contract can also serve as collateral for the bank. Another alternative is a term life insurance. There are therefore sensible alternatives to expensive residual debt insurance, some of which consumers do not know.
Remaining debt insurance: Useful for survivor’s protection
The residual credit insurance protects not only the bank from a loan default but also the survivors if the borrower dies before the loan is paid off. But the bad conditions make a residual debt insurance does not make sense but causes consumer advocates to question their benefits.
Raabe and her colleague from Saxony, Andrea Heyer, have now formulated new demands on providers of residual debt insurance in order to bring the originally consumer-friendly idea of insurance protection back into focus. These concern, for example, the free choice of providers and the better information on the part of the banks about alternatives to the residual credit insurance. It is to be hoped that in the future fair conditions for consumers and credit institutions will make it possible to safeguard borrowers and lenders alike.