Loan Cover - Watch Out For Payment Protection Sharks
Written by: Michael Challiner
The Financial Services Authority (FSA) has been investigating
the way Payment Protection Insurance is being sold by loan
providers which include some of the UK's biggest banks and
building societies. And it's big business. Sales of PPI as it's
called, earn lenders more than £1billion a year.
PPI is designed to protect borrowers by paying monthly loan
repayment in the event that the borrower becomes unemployed or
unable to work though accident or illness. Many lenders sell the
insurance alongside the loan with around 50% of customers
agreeing to the insurance.
However, according to the Department of Trade & Industry, only
4% claim and of these claims 25% are rejected. This may be
partially explained by the FSA's investigation which found that
around half of the lenders surveyed failed to explain the
details and exclusions to customers or make sure the insurance
was suitable for the clients. Whilst the investigation
reportedly does not find that lenders are compulsorily selling
the insurance, it was frequently automatically added to loan
quotations without it being disclosed that the insurance was, in
Even worse, some lenders are failing to point out to borrowers
that the cost of the insurance for the full period of the loan,
was being added as a lump sum at the outset rather than being
paid as a monthly premium. This means that the borrower cannot
cancel the insurance without redeeming the entire loan and
renegotiating a new loan.
And hey, some of these lenders certainly know how to charge for
PPI. According to Simon Burgess, Managing Director of British
Insurance Ltd, one of the big high street banks typically charge
£30 per £100 of loan insured. This, he says, compares with
between £4 and £6 if bought separately on the internet. This
view is supported by price comparison service uSwitch which says
taking out PPI with banks can increase the amount you pay for
cover by nearly 500%.
Take an example. Last year a high street bank was charging
£5,150 for PPI to cover a loan of £16,000. The cost of PPI was
then added to the loan making £21,150 as the total capital
repayable and interest charged on the lot. This meant that of
the £300 monthly repayment, about £70 represented the cost of
the insurance. Equivalent insurance can be bought on the
Internet for around £20 per month and cancellable at any time
So what are the lessons?
If your lender offers you PPI cover ask for the monthly premium
with and without PPI. That way you can see the true cost of PPI.
Find out whether PPI is added to the loan as an initial lump
sum. If it is back off!
Shop around for competitive quotes. A search on the Internet for
"Payment Protection Insurance" or "Income Protection Insurance"
will find you lots of web sites to try.
Check out the conditions on the insurance. Particularly check
out the exclusions which invalidate a claim. For example, some
policies stipulate that you must have been working continuously
for 6 months prior to a claim for a minimum of 20 hours a week.
Seasonal or temporary work is usually excluded. When you take
the insurance out you must be in good health and know of no
impending disability and not be aware that you could become
unemployed. Could these exclusions apply to you? If so, the
insurance will be of no use to you.
Please don't waste your money. PPI insurance is a good idea so
long as it is cheap and on a monthly cancellable contract. After
all your circumstances may change. Then check the policy's
exclusions to make sure that the insurance is valid for your
About the author:
Michael writes for Brokers Online. Brokers Online offer most UK
financial services including loans and life
insurance. Additional reading - Loans Topics
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