Payment Protection Plan
A payment protection plan is an optional service offered by some credit card companies and lenders that lets a customer stop making minimum monthly payments on a loan or credit card balance during a period of involuntary unemployment or disability. A payment protection plan is an optional service offered by some credit card companies and lenders that lets a customer stop making minimum monthly payments on a loan or credit card balance during a period of involuntary unemployment or disability. Although monthly fees for payment protection plans are relatively small, plans often have conditions and exclusions. A payment protection plan that covers the loss of life, involuntary unemployment, and disability might cost $0.35 per month for every $1,000 borrowed. If, for instance, you signed up for this payment protection plan to cover your $20,000 automobile loan, your monthly fee would be calculated as $20,000 divided by $1,000 multiplied by $0.35, which equals $7.00.
What Is a Payment Protection Plan?
A payment protection plan is an optional service offered by some credit card companies and lenders that lets a customer stop making minimum monthly payments on a loan or credit card balance during a period of involuntary unemployment or disability. It may also cancel the balance owed if the borrower dies. Payment protection plans charge the customer a small, recurring monthly fee based on the amount borrowed and the conditions covered.
Understanding Payment Protection Plans
Payment protection plans have eligibility requirements, conditions, and exclusions that customers should ensure they understand before signing up. You don’t want to pay for protection month after month only to find out that your plan doesn’t cover a specific situation when you want to use your coverage. The fine print is available in the payment protection plan agreement and disclosures, which you should be able to access from the lender’s or creditor’s website.
Here are some examples of the conditions you might have to meet to take advantage of your payment protection plan’s coverage if you become disabled:
Example of Payment Protection Plan
A payment protection plan that covers the loss of life, involuntary unemployment, and disability might cost $0.35 per month for every $1,000 borrowed. If, for instance, you signed up for this payment protection plan to cover your $20,000 automobile loan, your monthly fee would be calculated as $20,000 divided by $1,000 multiplied by $0.35, which equals $7.00.
Although the fee might seem small relative to the loan balance, consumers may be better off foregoing these plans and putting the money they would have spent on them in an emergency fund instead. That's because payment protection plans have so many conditions and exclusions. Another good use of the money would be to purchase long-term disability insurance and term life insurance, which are widely considered to be the best sources of financial assistance for individuals and their dependents in the event of disability or death.
Related terms:
Annual Percentage Rate (APR)
Annual Percentage Rate (APR) is the interest charged for borrowing that represents the actual yearly cost of the loan, expressed as a percentage. read more
Balance Protection
Balance protection is a form of credit card insurance that generally covers only the minimum monthly payments on a card’s outstanding debt. read more
Disclosure
Disclosure is the act of releasing all relevant company information that may influence an investment decision. read more
Emergency Fund
An emergency fund is a source of ready cash in case of an unplanned expense, an illness, or the loss of a job. Now there’s new help to build one. read more
Fine Print
The fine print refers to the details of a contract or offer that are often buried in the footnotes or in small print at the bottom of a document. read more
Grace Period
A grace period is a set amount of time a payment can be delayed without a penalty being imposed. Read about grace periods for credit cards and home mortgages. read more
Life Insurance Guide to Policies and Companies
Life insurance is a contract in which an insurer, in exchange for a premium, guarantees payment to an insured’s beneficiaries when the insured dies. read more
Private Label Store Credit Card Defined
A private label credit card is a store-branded credit card that is intended for use at a specific store. It offers credit and sometimes special benefits at those stores. read more
Recurring Billing
A recurring billing or recurring payment is when a merchant automatically charges a customer for goods or services on a prearranged schedule. read more
Term Life Insurance
Term life insurance is a type of life insurance that guarantees payment of a death benefit during a specified time period. read more