Credit Insurance and Other Add-Ons Built Into a Loan

The products you may be offered

The price may be charged as a single premium at signing, often added to the amount you borrow, or as a monthly charge on top of the payment. The agreement or a separate enrollment form says which.

When the cost counts in the APR

Regulation Z, 12 CFR 1026.4, counts premiums for credit life, disability and loss-of-income insurance, and fees for debt cancellation or suspension, as part of the finance charge. Paragraph (d) lets the lender leave them out only when three conditions are all met.

• The lender does not require the coverage, and says so in writing.
• The premium or fee for the first term of coverage is disclosed in writing.
• You sign or initial a written request for the coverage after you receive those disclosures.

If any condition fails, the cost belongs in the finance charge and the APR. A lender that tells you the loan depends on buying the coverage cannot also treat it as optional on the disclosure. The voluntary coverage disclosures appear with the federal box; see the Truth in Lending disclosure page for where.

A similar test applies to debt cancellation and debt suspension fees under paragraph (d)(3), whether or not the product is legally insurance. Section 1026.18(n) then requires the lender to put those voluntary coverage statements in the disclosures you receive before signing. In practice you will see a short statement that the coverage is not required, its price for the first term, and a place for you to sign or initial if you want it. If you never signed or initialed anything, ask why the product is on the loan.

What an add-on costs: a worked example

Take the site-wide example of $10,000 at 14% for 36 months, and suppose a single premium of $600 for optional coverage is added to the loan. The premium is a made-up figure for the example; the other numbers are computed, not offers.

The coverage adds $20.50 to each payment and $738.00 in all: the $600 premium plus $138.00 of interest on it. The APR does not move, because the premium is treated as optional and left out of the finance charge. That is why an add-on can hide in an offer that looks the same on rate. Line up the payment and the total you will repay for each offer, not only the rate.

How to spot an add-on in your papers

1. 1 Read the itemization of the amount financed. A premium paid to an insurer shows up as an amount paid to others on your behalf. If you only see a line offering the itemization, ask for it.
2. 2 Look for a separate signature or initials box next to a statement that the coverage is not required. That is the request Regulation Z refers to.
3. 3 Compare the loan amount with what you asked for. If the amount is higher than the cash you will receive plus any fee, something was added. The net proceeds calculator helps you trace the difference.
4. 4 Ask the lender to name every product attached to the loan, its price and whether it is financed.

Declining, cancelling and getting a refund

Before you sign, simply decline. Ask for a fresh disclosure without the coverage so the payment and total of payments reflect the change. You do not need to give a reason, and the lender cannot make the loan depend on it while also presenting it as voluntary.

After you sign, write to the lender or the insurer and ask to cancel. The Consumer Financial Protection Bureau, in its guidance on credit insurance sold with auto loans, says you can cancel these products and may be owed a refund when you prepay or refinance the loan. How much comes back, and whether it is paid to you or credited to the balance, depends on the policy and your state's insurance and lending law. Ask for the refund amount and method in writing.

If a refund does not arrive or the coverage was added without your request, complain to the lender first, then to your state's insurance regulator or lending regulator. State rules lists the lending regulator for each state.

Questions people ask