Debt-Protection Service Doesn't Mean
Debt Cancellation, Just a Postponement
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Debt-Protection Service Doesn't Mean
Debt Cancellation, Just a Postponement

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 closer look.
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 options.

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 or score.

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 term.

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 cancellation agreements.

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 bankruptcy.
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.

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