Issuing credit to a consumer is a very risky investment. In the case of unsecured loans, there is no guarantee that a creditor will receive repayment for the loan. If a debtor experiences financial trouble, then the lender may never receive compensation for the debt that the borrower accrued. Because of this, a company may choose to obtain business credit insurance.
Utilizing a line of credit is also a risky endeavor for borrowers. If they accumulate more debt than they can manage, then they may attain a low credit score, which will adversely affect any future financial undertakings. A debtor who cannot successfully handle his/her debts may even be required to file for bankruptcy.
In some instances, unforeseen circumstances make it difficult for a consumer to meet his/her financial obligations. Credit insurance will help to ensure that financial responsibilities are addressed in the event that a debtor is unable to pay his/her bills.
There are two primary types of credit insurance: business credit insurance and consumer credit insurance. Business credit insurance is often purchased by corporations to protect them from debt default. When a corporation loans a consumer or a small business assets and resources, there is no guarantee that it will ever be paid for this loan. A loan is granted based on the promise that a borrower will compensate the lender for the value of the loan. However, especially in the current economy, many borrowers find that they are unable to pay their debts. Therefore, many companies choose to obtain business credit insurance.
If a corporation purchases credit insurance, it will be compensated in the event that a borrower is unable to repay a loan. When a company is purchasing business credit insurance, it will be required to specify which accounts it wishes to insure. In doing so, a business will analyze the credit lines it has issued and the borrowers to which it has granted loans. Generally, a company will insure the most high-risk loans. For example, if a debtor has a history of defaulting on loans, then the corporation may choose to insure the loan that it has granted to this borrower. In other instances, a business may choose to insure a loan based on the value of the loan that was granted. If a line of credit has an exceptionally high limit, then the company may purchase credit insurance to cover this loan.
Many consumers also choose to purchase credit insurance in order to ensure that their bills continue to be paid in the event they are unable to address their debts. There are various different types of credit insurance a consumer can purchase. Credit life insurance will guarantee that a portion of a loan is paid if the borrower dies. This is a prudent measure for the sake of the spouse and the family members of the deceased because they will not be burdened with the responsibility of managing this debt.
Disability insurance will ensure that a debtor’s loan continues to be paid if he/she becomes injured or sick, and is unable to work. Likewise, involuntary employment insurance will continue to address an individual’s debts if he/she is laid off. A consumer may also purchase credit property insurance, which will protect any property that has been offered as collateral in a loan agreement in the event that the property is ruined by natural disasters, theft, or other detrimental activity.
Credit insurance plays a vital role in protecting both businesses and creditors from the adverse aspects of credit lines and loans.