San Diego, CA - The new product
being pushed on borrowers by lenders is known as debt
protection, not to be confused with debt cancellation, the
latter being closer to credit insurance of days gone by.
The debt protection gives the subscriber certain
leniencies in loan repayments, should a defined and
protected event occur.
Articles have begun to appear in some banking, credit
union, and credit card publications touting the benefits
and profits associated with peddling of debt protection
products to borrowers. When that happens, it's time for a
What is debt protection? A debt protection product is a
two-party agreement between a lender and a borrower. They
are considered optional loan products and are not
regulated as insurance products.
The borrower pays the lender a fee and in return, the
lender agrees to cancel, suspend or otherwise modify the
terms of the loan agreement if certain, named events
occur. This is usually handled as an addendum to the loan
agreement and describes how the debt may be cancelled,
suspended or otherwise modified. The agreement also
describes the so-called triggering event, such as death,
disability, involuntary unemployment, family leave or any
number of other events. The lenders are liable for any
costs associated with these products.
They are marketed under a variety of names such as Credit
Guard, Debt Protect, Premier Credit Protection and First
Protect among numerous others. The actual fee paid by the
borrower is set by the lenders, however the average cost
on several credit card agreements reviewed by the ICFE is
$.85 per $100 of loan balance or $8.50 per thousand
dollars of balance carried.
Here is how the industry describes their various product
Debt Protection Product -products offered in conjunction
with lending to provide for the formal restructuring of
debt when a protected event occurs.
Debt Cancellation Contract - Some or all of the debt is
cancelled or forgiven. Examples include canceling the
principal balance in the event of death, canceling the
remaining loan balance if a vehicle is totaled, or waiving
a monthly payment in the event of disability thereby
canceling accrued interest and some principal.
Debt Suspension Agreement (also Debt Deferment Agreement)
The accrued interest is cancelled and the loan balance is
frozen when a protected event occurs. Once the protected
event ends, the borrower will start repaying his or her
loan from where they left off. This essentially extends
the term of the loan without increasing the amount owed
and without suffering any penalty on their credit report
Payment holiday The contractual requirement to make a loan
payment is waived. However, interest continues to accrue
and no portion of the principal balance is cancelled,
which then extends the loan term and increases the
balance. The principal benefit of this low-cost product
feature is that it protects against loan delinquency, thus
protecting the member's credit rating.
Critical period benefits The benefits are limited to a
maximum duration, or critical period, as defined in the
debt protection product. For example, disability benefits
may be limited to a maximum of 12 months. This approach
provides benefits when they are most needed at a
significantly reduced cost compared to credit disability
insurance that provides a benefit for the remaining loan
Percentage wise, a borrower's chance of having a
triggering event occur during the term of the loan is very
low. Paying for the privilege of possibly suspending
payments at some point in the future is not a good value.
IF one is determined to purchase on some sort of
protection, buy credit insurance, which makes the
payments, and do not buy into debt suspension or debt
Lenders are starting to tailor their debt protection
products to the markets they serve. Many sub-prime
borrowers might feel more pressure to purchase these
products, thinking it might positively influence the
initial lending decision. The same is true with many
sub-prime borrowers who are attempting to obtain a credit
card, perhaps their first, perhaps their first after a
The offer for credit protection is more prominent in the
new card offers than the universal default clause, both of
which should be avoided. It is another good reason why
these types of fee-based, expensive credit offers with
lots of conditions, hurtful to borrowers, should be first
rejected and then shredded.
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation). The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely.
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.
The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org). CASDRAP disbanded in 2010, shortly after the web site project was completed. In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.
The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.
Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org. Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G, a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.