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Last Updated on May 17th, 2023 at 12:04 pm

Key Points

  • Lenders can sometimes sell payday loans and installment loans with credit insurance
  • This usually expensive insurance claims to protect you against missed loan repayments
  • You are not required to take the insurance. It’s a red flag if a lender says you must!

What Is Payday Loan Insurance?

Lenders sometimes offer customers loan insurance with their payday or installment loan. This protects the consumer in the case that they cannot repay the loan on time. Credit insurance is optional insurance that will cover your payments to the lender in particular situations, such as if you become ill or injured and can’t work, if you become disabled, or die. 

If you miss payments or encounter an emergency that prevents you from repaying your loan on time, the payday loan insurance will cover you to avoid any damage to your credit score. 


How Do I get Credit Insurance?

In most cases, you can purchase credit insurance directly from your lender when you apply for your payday loan. The lender can promote a type of insurance policy to you when you’re purchasing your loan but can not require you to buy it.


Is Credit Insurance Right For Me?

Before deciding to buy a credit insurance policy from a lender, consider your requirements, your choices, and any charges that you may need to pay.

 You may conclude that credit insurance is not necessary for you. Credit insurance can be a very expensive type of cover and may include hidden fees. Moreover, in your situation, another form of cover may be more suitable. For example, it could be less expensive and more practical for you to get life insurance than credit insurance.


  • If you miss payments, the payday loan insurance will cover you
  • If you become unemployed or disabled, insurance can continue to meet the repayments
  • Credit insurance can pay all or part of your loan if you pass away to prevent leaving behind debt
  • You can avoid damage to your credit score.


  • Credit insurance is usually very costly
  • It may include hidden fees
  • If the premium is financed as part of the loan, you’ll pay additional interest
  • Another form of cover may be more suitable e.g. life insurance


The FTC recommends asking the following questions before deciding to buy credit insurance: 

  • How much is the premium?
  • Will the premium be financed as part of the loan? If so, it will increase your loan amount, and you’ll pay additional interest and more for points (if points are on your loan).
  • Can you pay monthly instead of financing the entire premium as part of your loan?
  • How much lower would your monthly loan payment be without the credit insurance?
  • Will the insurance cover the full length of your loan and the full loan amount?
  • What are the limits and exclusions on payment of benefits – that is, spell out exactly what’s covered and what’s not.
  • Is there a waiting period before the coverage becomes effective?
  • If you have a co-borrower, what coverage does he or she have and at what cost?
  • Can you cancel the insurance? If so, what kind of refund is available?

If you do not want to buy credit insurance, tell the lender.


I was offered insurance with my loan. Do I have to take it?

Credit insurance is optional insurance.

You are not required to take out payday loan insurance from your lender. If the lender continues to pressure you to take insurance, consider looking elsewhere. It’s a red flag if the lender tells you that you must have insurance. If a lender insists that you have to have insurance, you should avoid that loan and carefully review your papers to be sure they have been accurately drawn up.

Remember – lenders can’t deny you credit if you don’t take out optional credit insurance. They also cannot refuse your loan if you choose to buy insurance elsewhere and not directly from them. 

If a lender tells you that you’ll only get the loan if you buy optional credit insurance, report the lender to your state attorney general, your state insurance commissioner, or the FTC


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Katie Fisher

Katie Fisher studied English Literature before working in consumer finance as a research and content writer. She was one of the first members to join the Pheabs family and has developed a following for her writing, especially surrounding high cost loans and increasing transparency. You can follow her here on Linkedin.