Anyone who takes out a loan naturally assumes that they will also be able to repay it. But sometimes there are unexpected changes in life that also affect the financial situation.
You get sick for a long period of time, unexpectedly lose your job or die. Then suddenly the money is no longer enough to meet the payment rates.
Although security has been provided for such cases, a residual debt can still remain, which is demanded by the debtor or his relatives. To hedge this risk, banks in Austria usually offer credit default insurance when lending. Before you sign it, you should know exactly what it is and check whether it actually makes sense in your case.
What is credit default insurance?
In Austria, a credit default insurance or residual debt insurance is an insurance policy that is taken out for personal loans in order to protect you from the inability to repay the loan.
Occasionally one hears the term credit insurance in this context. However, this is wrong with personal loans! In Austria, the word credit insurance refers to insurance taken out for large transactions between companies, which is usually intended to cover a loss of payment and benefits after advance payments to a supplier.
When does the credit default insurance come into effect?
Residual debt insurance only comes into effect if the borrower is unable to repay the loan due to unintentional unemployment, incapacity to work or death. If you are unemployed yourself, for example, because you quit or have been terminated due to an offense, the residual debt insurance does not pay.
Even if there is not enough money for other reasons, such as a family member’s incapacity to work or unexpected expenses, this is not covered by insurance. So, despite the insurance, you are still obliged to use your income carefully to be able to repay the loan.
If you are unable to work due to illness, the insurance only pays from the end of continued wages in the event of illness, i.e. at the earliest after the sixth week of incapacity to work. It can also happen that the insurance is limited to illnesses that already existed when the insurance was taken out.
What types of credit default insurance are there in Austria?
Depending on your personal financial and life situation, different forms of residual debt insurance can be useful for you. For example, you can take out a life insurance policy, also known as risk life insurance.
You can choose insurance against disability or disability or one that only applies in the event of unemployment. Any combination of the three variants is of course also possible. However, insurance is often required by the bank to a certain minimum extent.
What to look for in the event of unemployment with a credit default insurance?
As already mentioned, this insurance only applies if you are unemployed through no fault of your own, such as if your employer goes bankrupt, staff cuts or dismissal due to lack of demand. If a temporary employment contract expires, the residual debt insurance does not pay! You should have planned it in from the start.
The insurance covers the payment installments until you have found a new job. After that, even if your income is lower than before, you will have to repay your loan yourself.
Please also note that the duration of the start of payment can be determined differently by the insurance contract. Some insurance companies only pay for a certain period of unemployment, others only after a certain period of time.
When is the residual debt insurance useful?
Before taking out residual debt insurance, check carefully whether it is really necessary. For example, if you already have life insurance, you are subject to protection against dismissal, for example as a civil servant, or if your spouse’s income is high enough to cover the loan in an emergency, the insurance is unnecessary.
Residual debt insurance is usually not used for small loans with low payment rates or high collateral that is expected to cover the entire payment amount. With large amounts of credit and if you have a family to look after as a single earner, however, it usually pays off.
Read the contract carefully, work out possible scenarios and, if in doubt, get advice from an expert independent of the bank before you decide for or against the insurance.
What does residual debt insurance cost?
The number of premiums for residual debt insurance can vary widely. It depends on the services included and the amount of the loan.
The duration, age, and any known illnesses also influence the risk of the insurance company and thus the price. If possible, compare prices and conditions from several providers before you decide.
If the cost of the residual debt insurance exceeds 10% of the loan amount, you should definitely look for cheaper offers, or check again whether the insurance is really necessary.