Loans and Credit, by nature, are exposed to risk. There are cases where lenders incur losses for loans or credit lines where a debtor fails to delivery payment. Most cases, these are debts which are high in value. To be certain that a lender is paid by a borrower’s default or even insolvency, a credit insurance can protect the lender. Credit Insurance does not only cover lenders but also covers other companies who want to insure their accounts receivable.
So how does a credit insurance work?
Credit Insurance protects a lender or a company from its customer’s default to pay their debts. The debts may arise from borrower’s increasing expenses causing lack of funds or even insolvency. These cases where a borrower is no longer able to pay the debt acquired from a loan, the credit insurance will protect the lender by getting the loan amount back from the insurance company with a fee.
Credit insurance companies monitor a lender’s financial status of the borrower. The credit insurance company constantly monitors the risk that is involved with a borrower of paying the debt. Based on the risk review made by the credit insurance company, the lender gets a certain credit limit to which they can claim against in case the borrower becomes unable to pay or even insolvent. The limit granted may change based on the review of credit risk of the borrower.
The purpose of getting a credit insurance may bring the following advantages for a lender:
- It allows the lender to receive claims for a from a debtor’s insolvency or inability to pay. There may be losses but this will minimize the possible losses that a lender may take from a debtor’s default.
- Improves lender and borrower relationship since lender has a peace of mind and there is no need for the lender to constantly remind the borrower of the amount due.
Credit Insurance may prove to be complicated and a thorough plan and review must be made before taking one. This means of protecting the amount borrowed is a very effective way to protect the lender from losses when unable to collect.