The Insurance Hiding Inside Your Car Loan

Somewhere on page three of Farhan’s car-loan sanction letter, a passenger had boarded: “Credit Shield Premium — ₹25,000, financed.” Nobody asked him. The premium was added to his loan principal, which means for five years Farhan pays interest on his own insurance — a policy that protects the bank’s loan, chosen by the bank, from an insurer that pays the bank a commission for the introduction. Three parties at the table, and the man paying for lunch wasn’t consulted on the menu.

The machinery: the packed premium

Loan-linked insurance — “credit shield”, “loan protector” — is sold at disbursal, when your signature hand is already warm and your attention is on the car keys. The trick is not the insurance (loan cover can be sensible); it is the packing: a single premium for the full tenure, financed into the principal so it feels free, at group-policy pricing you never compared, generating a commission the bank keeps. Farhan’s ₹25,000, financed at 9.5% over five years, actually costs about ₹31,500 — and if he forecloses the loan early, the “refund” of unused premium has a way of becoming a customer-service archaeology project.

The choice they skipped

The honest comparison was never offered: a plain term insurance top-up covering the loan amount costs a fraction of packaged credit-shield pricing, pays your family (not just the bank), survives a balance transfer, and is bought at rates you compared yourself. RBI has repeatedly reminded lenders that insurance with a loan cannot be mandatory and the customer’s choice of insurer must be respected — a reminder that exists, tellingly, because branches keep needing it.

Run your own numbers, right here

How to protect yourself

Read the sanction letter’s fee table before signing — every line, out loud if needed. Ask directly: is any insurance included, is it mandatory (the answer must be no), and what is the loan without it? If you want cover, buy term insurance separately the same week. If a premium was packed without consent, write to the lender citing mis-sale and copy the banking ombudsman portal; packed premiums have a good refund record when challenged in writing. The car is negotiated in lakhs; don’t donate thousands on page three.

Isn’t loan cover a good idea for my family?

Cover is a good idea; this packaging of it is expensive and bank-first. A term top-up equal to your total debts, bought independently, does the same job better and cheaper.

They said the loan “requires” their insurance.

It does not, and saying so is a compliance violation. Ask for that requirement in writing and watch it evaporate — few sentences dissolve faster at a bank desk.

Disclaimer: This article is for general information only and is not financial or tax advice. Consult a qualified advisor before making investment or tax decisions.