The personal loan is essentially an unsecured loan which is given without any collateral security based on the earning potential of the borrower. Thus the primary risk of the loan is always with the lender who shall have to devise means of recovering the loan in case of default due to intentional delays or conditions beyond the control of the borrower. In case of the untimely death of the borrower the burden of servicing the remaining amount of the personal loan falls on to the family members. Thus in the interest of the lender as well as the borrower there must be some form of personal loan repayment protection that does not necessitate mortgaging or hypothecating an asset by the borrower.
Insurance as Protection
This has been found to be the most suitable protection that can be accorded to an unsecured personal loan that has the potential of creating problems for both the lender as well as the borrower. After several years of field research the financial companies have arrived at the decision of insurance as being the best possible solution. Most of the banks today insist on the borrower in taking a suitable policy at the time of disbursement of the loan.
Insurance Schemes for Protection
Insurance for the amount of personal loan borrowed entails a minor additional expenditure for the borrower but ensures that neither the lender nor the family members of the borrower are in trouble in case of the sudden demise of the borrower. This kind of insurance can be availed in two basic forms. One as a term loan with an annual premium or one time premium covering the amount of loan availed at the time of approval.
The other scheme is of a regular monthly premium of a very small amount that covers the outstanding amount of the personal loan. This premium is on a reducing basis as the outstanding amount reduces over the repayment period. If the scheme opted for is a ULIP product then one may actually end up generating some additional income based on the growth of the units bought during the loan repayment tenure.
Conditions Covered through Insurance Protection
Insurance as a protection for repayment of a personal loan covers various contingencies which may render the borrower incapable of continuing with further repayments. Some these are:
- Death of borrower.
- Loss of income of the borrower due to conditions beyond his control.
- Permanent disability leading to loss of income by the borrower.
- Temporary disability which may render the borrower jobless for a specific period of time when he cannot continue repayments.
- Other contingency which the insurer and the borrower may agree upon to cater for unforeseen circumstances.
Thus while availing the easy and simplified personal loans to meet various kinds of requirements one must create adequate protection for the repayment of the loan under conditions listed above so as to protect the family members from undue financial burden.