Loan cover watch out for Payment Protection Sharks
Below is a MRR and PLR article in category Finance -> subcategory Loans.
Beware of Payment Protection Sharks in Loan Cover
Borrowers beware: while around 50% take out Payment Protection Insurance (PPI) with their loans, many aren’t getting what they bargained for. Let’s explore the pitfalls and how to avoid them.
Understanding the Issue
The Financial Services Authority (FSA) has been scrutinizing how PPI is sold by major UK banks and building societies. This is a lucrative market, with PPI sales bringing in over £1 billion annually for lenders.
PPI is meant to help borrowers by covering monthly loan payments if they become unemployed or unable to work due to illness or accident. It’s often sold alongside loans, and about half of the customers opt for it.
The Problem with PPI
Despite the promise, only 4% of policyholders make a claim, and of those, 25% are rejected. The FSA found that many lenders don’t properly explain the policy details or exclusions, leaving customers in the dark.
A concerning practice is the automatic addition of PPI to loan quotes, often without clear disclosure that it’s optional. Even worse, some lenders roll the full insurance cost into the loan at the outset, locking in borrowers until the loan is fully paid off.
The Cost Trap
Lenders can charge exorbitant rates for PPI. Simon Burgess, Managing Director of British Insurance Ltd, highlights that a major bank can charge £30 for every £100 of loan insured. In contrast, similar coverage can cost just £4 to £6 if purchased online.
For example, a high street bank charged £5,150 for PPI on a £16,000 loan, raising the repayable amount to £21,150. This added £70 to the monthly payment, while similar coverage was available online for about £20 per month and could be canceled at any time.
How to Protect Yourself
1. Ask for Costs with and without PPI: Always request a breakdown of your loan payments with and without PPI to see the real cost.
2. Check for Lump Sum PPI: Verify whether the PPI is added as an upfront lump sum. If so, consider looking elsewhere.
3. Shop Around: Use the internet to compare competitive quotes for Payment Protection Insurance or Income Protection Insurance.
4. Read the Fine Print: Understand the conditions and exclusions. Some policies require continuous employment for six months and exclude seasonal or temporary work. Ensure you’re in good health and not facing likely unemployment. These conditions could make the policy useless for you.
5. Don’t Waste Money: PPI can be beneficial if it’s affordable and on a monthly, cancellable contract. As your circumstances may change, ensure the policy’s exclusions align with your situation.
In summary, while PPI can offer peace of mind, it’s crucial to choose wisely and ensure the premium is fair and the conditions are suitable for your needs.
You can find the original non-AI version of this article here: Loan cover watch out for Payment Protection Sharks.
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