When Should You Consider a Consumer Insurance?

A consumer insurance gives you the flexibility and opportunity to spend the money as you see fit. Unlike credit cards, these insurances are usually provided with a lower interest rate and a longer down payment.

Here we take a closer look at when it is appropriate to use a consumer insurance, and On the contrary, when it is not.

When can a consumer insurance be the right form of financing?
An unsecured insurance means that the debtor does not need to provide security for the insurance. However, the lender(s) have other ways to get their money back, so they shouldn’t be misinterpreted.

These insurances are better suited to individuals with stable finances. In other words; People with stable income and low to medium degree of family debt.

With a good credit score, you will also get rewards with lower interest rates. This is because the risk of default is lower, as viewed from the perspective of banks.

Unsecured insurances are also wise in cases where there are no realistic ways to secure the insurance. For example, you would never finance your home this way (that’s why we have mortgages), but you might want to use it for other purchases that can’t be secured.

Insurances without collateral should also be used to finance goods of long-term value. For example, to build a shed where you can work on your hobbies or a lawn mower that will last for many years.

What should not be used?
Here is a short list, with some items that should not be financed with unsecured insurances:

1. Fixed Monthly Costs: Unless we’re talking about a one-time exception (say your washing machine is down), you should never use it to cover your monthly fixed costs.

If you cannot afford these expenses on a monthly basis, it is an indication that your household budget is under severe strain. Borrowing money to pay the bills will only increase the financial stress on your family.

2. Down payment on the mortgage: The down payment requirement should not be funded with anything other than your own savings. There are several reasons for this, but the main one has to do with the financial risks you are exposed to.

If interest rates go up (or if you lose your income), you will have severe problems covering your monthly mortgage bills. An unsecured insurance will only add to the stress of the situation.

Also, let’s not forget why banks are required to ask for a down payment in the first place. This makes you get less financial opportunity when you sign for a mortgage.

3. Interest on other insurances: This may seem obvious, but it should not be ignored. Never use a consumer insurance to pay interest on other insurances. You just push the problem in front of you, and you add fuel to the fire.