Payment protection insurance

Payment protection insurance is designed to let a borrower keep up repayments on a borrowing if they fall sick or are made redundant.

But the cost of the premiums can sometimes be twice as much as the interest on the loan.

No one is legally obliged to add payment protection insurance. And if you want it, it can be much cheaper to shop around on the internet or go to a local insurance broker - perhaps a third or half of the price of buying from a bank. However, banks claim their own cover is more extensive.

But it does not cover you if you are self-employed or on a short term contract. So you really do need to read the small print.

So brokers do have a vested interest in trying to get this business away from the banks. But one broker says banks often give borrowers loan repayment quotes without revealing that the figure includes insurance.

Another broker did a survey and found that nine out of ten of the biggest lenders automatically included insurance cover in the loan quote when they were first contacted.

Banks will also add the full cost of the insurance to the loan up front, rather than charging it monthly. Then you pay interest on the insurance cost as well, not just on the money you wanted to borrow.

One estimate is that loan companies make £1 billion a year from selling payment protection insurance.

Is payment protection insurance necessary?

A DTI survey in 2002 said only 4% of policyholders had tried to claim. Typically 25% of claims are rejected.

The Treasury Select Committee is to ask the OFT again to look at payment protection insurance.

What should you do about loan protection insurance?

We do not offer financial advice. When you borrow, decide for yourself:

• Do you need payment protection insurance? - it can give peace of mind, but at a price of course
   
• If so, shop around.

More on payment protection insurance in Barclays Bank from The Guardian - March 2004

Payment protection insurance - Citizens' Advice views - September 2005

They say payment protection insurance is failing many of those who need it most, adding to their debts instead of protecting them against hard times. They claim the insurance (sold to cover credit payments in the event of illness or job loss) is often very expensive, mis-sold to people who cannot possibly claim on it, and designed to exclude many of the most common situations that can lead to debt problems.

Citizens Advice is making a complaint to the Office of Fair Trading, calling on them to launch an investigation into the payment protection insurance (PPI) business, which has an estimated 20 million policies in force and produces annual revenue in excess of £5 billion.

They say problems occur in nearly all sectors of the consumer credit market – from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies.

The premium paid can be equivalent to 25% of the value of a loan and has to be paid for by borrowing more. It is common for interest to be charged on PPI premiums in credit agreements. Payment protection insurance on some credit cards can increase the cost of borrowing by around 9% a year.

Borrowers are often sold completely inappropriate policies when they take out credit agreements. In many cases high pressure sales or inertia selling are used to force people to take out insurance that they cannot afford, do not want or need, and cannot benefit from.

Policies sold by several well-known mainstream lenders exclude cover for common problems like bad backs and mental health problems that can stop people working. Many also have arbitrary age limits and ban the self-employed and those on fixed-term contracts from making a claim.

Even where people are able to make a successful claim, the amounts paid out do not guarantee to keep them free from debt, particularly credit card debt. Some insurance only pays out for a year, and then only covers minimum payments.

For example, a borrower getting payments from a PPI policy to cover a £1,000 credit card debt could see their debt reduce by just £12 over one year.

Delays in the payment of claims can trigger spiralling debt and administration charges, leading to borrowers being pursued by debt collectors and the threat of court action.

Citizens Advice says that PPI is a particular problem for the most vulnerable borrowers, who are also the people most at risk of running into financial difficulties. Earlier research found that 85% of CAB clients who had claimed on payment protection insurance had been unsuccessful – in sharp contrast with industry assertions that only 15% of claims are turned down.

Bad practice in the sale of payment protection insurance is also often linked to irresponsible lending. CAB advisers report cases where consolidation loans advanced to borrowers already in financial difficulty are rolled over several times, with a new PPI policy sold each time, increasing the debt significantly.

Citizens Advice is calling on the Office of Fair Trading to launch a market investigation into the sale of payment protection insurance with credit products. It also wants the Treasury Select Committee to hold an inquiry into payment protection insurance, particularly the costs and incentives involved.

And it is urging the Financial Services Authority to develop a basic PPI policy setting out the minimum acceptable standards with which all lenders should comply. It says there should be a cap on the cost of premiums and no blanket exclusions.

The FSA on payment protection insurance - September 2005

The FSA says it will review payment protection insurance selling practices. The review will start in April 2006 and report in - wait for it - November. Outside the prime mortgage market, they think selling practices in other parts of the general insurance market are "very poor".