What is credit protection?
Credit protection is an instrument for risk reduction in finance. With a credit protection, or credit security, the risk of default in the context of an installment loan or construction finance is reduced. Credit protection actually occurs wherever there is a creditor-debtor relationship. You can secure a loan by including things, rights, insurance or the creditworthiness of third parties as security in the contractual relationship.
Why do you have to secure a loan?
The bank needs credit protection to ensure that it gets its money back from a borrower. Security applies when the borrower gets into payment difficulties and can no longer pay the loan installments. Then the bank seizes property of the borrower via a court, for example. That turns the bank into money and thus balances the loan.
Above all, a borrower should secure his installment loan to protect his family and relatives from financial burdens in the event of an emergency, such as disability or, in the worst case, death. If the borrower dies, his survivors inherit not only his property but also his debts. If the bereaved accept the inheritance, they must recognize both the assets and the debts as heirs. If it is clear from the outset that the inheritance consists largely of debt, the surviving dependents can actively reject the inheritance within 6 weeks of becoming aware of the inheritance. If this period expires, the inheritance must be started. Depending on how high the potential debt is, this can result in high debt for the heirs. You can prevent this from happening by securing your credit.
Both contracting parties need credit protection, especially for loans with long terms of 10 years and more and large sums. Even if the borrower’s creditworthiness is not the best, for example because he has a negative credit check entry, a low income or already has other loans, you should secure a loan.
A rule of thumb is that one should secure the loan with loan amounts starting from 25,000 dollars.
How can I secure a loan?
There are several ways you can secure a loan. Some of these are common and commonly used types of credit protection, others may be less common, but still useful. We would like to introduce some variants to you. Three of these directly affect the loan agreement and two also secure you beyond the loan agreement. All the types that we explain below have their advantages and disadvantages and are more or less useful in some situations and under certain circumstances.