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The loan industry is clapping its hands in glee as it receives over 1 billion a year from borrowers seeking to insure their loans. The Financial Services Authority (FSA) decided to look into Payment Protection Insurance (PPI) and find out more about the way that lenders convince individuals to take out this type of insurance. The investigation highlighted a number of worrying facts.
Before we progress, let's just explain what PPI is. It's an insurance that means if you take out a loan, and then find yourself unable to work because of accident, sickness or unemployment, the insurance will cover your loan repayments on your behalf. 50% of all borrowers sign up for PPI when they take out the loan.
The Department of Trade and Industry has uncovered a fact that highlights just how much money is being wasted, as only 4% ever make a claim, and only 25% of those claims are rejected, which means that in total, only 3% of individuals with PPI ever make a successful claim. The FSA found a few reasons why borrowers were signing up so readily:
around 50% of the loan providers surveyed did not satisfactorily explain to borrowers the many exclusions that could stop them from making a claim. This meant that individuals undesirable for the insurance were still signing up.
some lenders were not making it clear to the customers that they did not have to take out the insurance to get the loan. A common trick was to add the PPI to the quotation without actually pointing out that the insurance is optional.
some lenders were adding the entire cost of the PPI for the duration of the loan to the first payment. This means that the insurance was paid before the loan itself, and the borrower had no option to cancel the insurance because it had already been paid.
It has also been noted that in the industry there is a huge disparity in price. Simon Burgess is Managing Director of British Insurance Ltd, and he looked into the issue of price, discovering that one of the enormous name, mainstream banks was charging a massive 30 a month per 100 of loan insured for PPI. Simon added that a few online quotes for the same loan would have uncovered rates of 46 a month. Price comparison service uSwitch has backed up these findings, so it's true, the most expensive monthly charge is nearly 500% more expensive than the cheapest deal that's what we call being overcharged!
We can back this up with figures. A mainstream bank quoted 5,150 for PPI, against a loan of 16,000 last year. That means the borrower is 21,150 to the bank in total, and would be charged interest on that entire amount. The monthly repayments were 300, 70 of that was due to the PPI. So that's 70 a month to insure a loan of 16,000. An online search revealed that a loan of the same amount, that could also be cancelled at any time without penalty, would be just 20 per month. That is a serious saving.
If you want to get PPI, we say:
Make sure that when you get your loan quote, it is given with and without PPI then you can see just how much it actually costs.
If you get a quote and you find that the PPI is added as a lump sum at the beginning, go no further with that company.
Always check out the competition before accepting your lender's PPI Search under Payment Protection Insurance? or Income Protection Insurance? and see what the online insurance companies can offer you.
Read the exclusions. This is essential because the insurance may not fit your needs. For example, seasonal and temporary workers are usually excluded, and this can go for contract workers too. If you've only been in your job a month, be aware that to make a claim you will normally have to be with a company for six months first. You will also find that if you become ill and you have suffered from that illness prior to taking out the insurance (called a pre-existing condition') you may not be covered. If any of these situations apply, you're not suitable, and there are many more exclusions.
Basically, PPI is often not worth the money. If you are taking out a enormous loan and really need that peace of mind, then make sure you get the cheapest deal (usually not from your lender) and take advantage of the fact that if you purchase it separately, you can cancel it whenever you want. First and foremost, read the policy in full first, you may find that your situation is not applicable to its terms and exclusions.
Before we progress, let's just explain what PPI is. It's an insurance that means if you take out a loan, and then find yourself unable to work because of accident, sickness or unemployment, the insurance will cover your loan repayments on your behalf. 50% of all borrowers sign up for PPI when they take out the loan.
The Department of Trade and Industry has uncovered a fact that highlights just how much money is being wasted, as only 4% ever make a claim, and only 25% of those claims are rejected, which means that in total, only 3% of individuals with PPI ever make a successful claim. The FSA found a few reasons why borrowers were signing up so readily:
around 50% of the loan providers surveyed did not satisfactorily explain to borrowers the many exclusions that could stop them from making a claim. This meant that individuals undesirable for the insurance were still signing up.
some lenders were not making it clear to the customers that they did not have to take out the insurance to get the loan. A common trick was to add the PPI to the quotation without actually pointing out that the insurance is optional.
some lenders were adding the entire cost of the PPI for the duration of the loan to the first payment. This means that the insurance was paid before the loan itself, and the borrower had no option to cancel the insurance because it had already been paid.
It has also been noted that in the industry there is a huge disparity in price. Simon Burgess is Managing Director of British Insurance Ltd, and he looked into the issue of price, discovering that one of the enormous name, mainstream banks was charging a massive 30 a month per 100 of loan insured for PPI. Simon added that a few online quotes for the same loan would have uncovered rates of 46 a month. Price comparison service uSwitch has backed up these findings, so it's true, the most expensive monthly charge is nearly 500% more expensive than the cheapest deal that's what we call being overcharged!
We can back this up with figures. A mainstream bank quoted 5,150 for PPI, against a loan of 16,000 last year. That means the borrower is 21,150 to the bank in total, and would be charged interest on that entire amount. The monthly repayments were 300, 70 of that was due to the PPI. So that's 70 a month to insure a loan of 16,000. An online search revealed that a loan of the same amount, that could also be cancelled at any time without penalty, would be just 20 per month. That is a serious saving.
If you want to get PPI, we say:
Make sure that when you get your loan quote, it is given with and without PPI then you can see just how much it actually costs.
If you get a quote and you find that the PPI is added as a lump sum at the beginning, go no further with that company.
Always check out the competition before accepting your lender's PPI Search under Payment Protection Insurance? or Income Protection Insurance? and see what the online insurance companies can offer you.
Read the exclusions. This is essential because the insurance may not fit your needs. For example, seasonal and temporary workers are usually excluded, and this can go for contract workers too. If you've only been in your job a month, be aware that to make a claim you will normally have to be with a company for six months first. You will also find that if you become ill and you have suffered from that illness prior to taking out the insurance (called a pre-existing condition') you may not be covered. If any of these situations apply, you're not suitable, and there are many more exclusions.
Basically, PPI is often not worth the money. If you are taking out a enormous loan and really need that peace of mind, then make sure you get the cheapest deal (usually not from your lender) and take advantage of the fact that if you purchase it separately, you can cancel it whenever you want. First and foremost, read the policy in full first, you may find that your situation is not applicable to its terms and exclusions.
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