The Financial Services Authority (FSA) has been looking into Payment Protection Insurance (PPI) and how it is sold to people getting loans in the UK. On the list are some of the UK's biggest banks and building societies, and it brings in over GBP1 billion a year for the lenders.
The idea behind PPI is that if a loan borrower loses their job or can't work because of an accident or illness, the loan provider will pay their bills until they can go back to work. For this insurance, the borrower pays a monthly premium, which about half of them agree to when they get the loan.
But some interesting information has come to light. The Department of Trade and Industry has found that only 4 percent ever make a claim, and only 75 percent of those claims meet the terms of the insurance. In many ways, the lenders themselves are to blame for this. The FSA found that about half of the lenders they talked to didn't explain the details and exceptions to borrowers before they signed up. The investigation also found that lenders did not tell customers that the insurance was required, but they often added the PPI to the quote without making it clear that it was optional.
The FSA also found that some lenders were not telling borrowers that the cost of insurance for the whole loan term was being added as a lump sum at the beginning instead of as a monthly payment spread out over the loan term. Because of this, borrowers couldn't get rid of the insurance without paying off the loan in full and getting a new loan.
Price was another bad thing that the investigations found. Simon Burgess, the Managing Director of British Insurance Ltd, said that one of the biggest high-street banks charges borrowers GBP30 for every GBP100 of insured loan. Simon also said that borrowers could find rates of GBP4 to GBP6 per GBP100 of insured loan on the Internet. A service that compares prices, called uSwitch, has confirmed his findings. This means that banks are charging almost 500% more than their online competitors.
As an example, a high street bank charged GBP5,150 for PPI on a loan of GBP16,000 in 2005. So, the total amount of the loan was GBP 21,150, and the borrower would have to pay interest on the whole amount. The monthly payments were GBP300, and PPI would be GBP70 of that. You could easily find similar insurance on the Internet for about GBP20 per month (GBP50 less per month), and the insurance could be cancelled at any time without any trouble.
This is what we think:
When you get a quote, ask for it with and without PPI. That way, you can see the real cost of the insurance and compare it directly.
Check to make sure that the PPI isn't added to the loan at the beginning and has to be paid all at once. Don't even think about getting one of these loans.
Don't take the lender's PPI without first seeing what else is out there. Just type "Payment Protection Insurance" or "Income Protection Insurance" into a search engine, and you'll get a number of quotes quickly and easily.
Read the fine print on the insurance. There will be a long list of things that you can't make a claim for. For example, if you only work part-time or seasonally, you probably won't be able to join. Some policies say that you have to be at the same job for six months before you can make a claim. Most policies make it clear that you must be in good health and have no reason to think you might not be able to work in the future. There are many more exclusions on the list, and if any of them apply to you, there is no point in paying for PPI.
We say that PPI is a waste of money in the eyes of many people. If it does work for you, find the best deal and make sure you can cancel the insurance at any time without being charged. You could change your mind or your situation could change. Also, make sure you read the fine print, because you may find out that you can't make a claim anyway.
