Unsecured Debt and Credit Life Insurance

Online, January 28, 2014 (Newswire.com) - Unsecured credit applications, especially from the smaller credit providers, do not seem to be scrutinized as closely as secured debt applications for houses and cars. Perhaps that explains part of the unsecured debt explosion that took place since the advent of the National Credit Act. If one thinks of the precision with which lenders can predict trends and repayment probabilities one can easily imagine that they certainly wouldn't make mistakes in miscalculation of risk with unsecured debt. But the question should rather be whether there is enough incentive to want to calculate it correctly. There has been a lot written in the media about securitization of certain debt instruments and even speculation around the validity of collecting on debt that has essentially transferred ownership by listing it on a stock exchange.

But a strange argument develops around the credit life insurance that the consumer pays for and essentially dramatically reduces the risk for the credit provider. Not only that, but in many cases, the credit providers might also make a lot of extra profit from the resale of these add-on instruments. Now that administration fees and loan origination fees are capped in terms of regulations of the National Credit Act, and as we know, interest rate caps (linked to the prevailing repo rate) exist in that same section of the act, credit life insurance seems like the only other instrument that is not very clearly defined. But there are indications that the industry might look at setting those down in registration guidelines. To get back to the argument, in simple terms we have a product that dramatically reduces risk, and even covers for retrenchment to a certain extent, yet the credit provider does not seem to reduce the interest rate in line with the reduced risk. It also seems to ultimately be to the benefit of the shareholders of those debt instruments, and not really to the bank, barring the added profit the make with the resale of those insurances.

Interestingly it is not the added profit that seems to have drawn the only attention, but also the low level of claims as a portion of the collections. It seems as if many people just don't bother to claim on those policies or are not aware of their rights in terms of the credit life insurance. Eugene Cilliers, a registered Debt Counsellor with Pay Plan Solutions, commented that he would like to see that credit providers do more, not to oppose clients who want to move this type of insurance or obtain competitive quotes from other service providers. The industry could certainly do with a lot more competition. He mentioned that he had referred some of his clients to Zestlife in the past as they seem to offer a very good comparative product in his opinion.