What Are Debt Cancellation Fees?

Debt cancellation fees are fees paid by borrowers as an insurance against their cancellation of the debt. Debt cancellation fees can be called debt cancellation insurance. Debt cancellation fees can be set up ensure the payoff someone's debt upon death or inability to pay off the loan. The lender then cancels the debt, considering it paid in full.

Debt cancellation fees can be voluntary or mandatory. Debt cancellation fees for auto loans are called Guaranteed Automobile Protection or GAP.

Debt cancellation fees are based on the amount borrowed and type of coverage. Fees range from a few cents to $1 per $100 borrowed. A debt cancellation fee that only covers death is lower than the fee that covers death and disability, due to the greater likelihood of either event occurring.

Debt cancellation fees must be disclosed in the finance charge or disclosures sections of credit card contracts. Debt cancellation fees can be charged by lenders to insure against losses even if they are not otherwise permitted to sell insurance under state law. If the debt cancellation fee is optional under state law, the consumer must consent to the debt cancellation fee before it can be applied to his loan.