Who needs loan protection?

If you’re taking out a loan, beware of being misled into taking out payment protection insurance. From a recent questionnaire, it appears that around 25% of consumers were under the impression that by taking out this expensive and often totally unnecessary insurance, they were actually improving their chances of getting their loan.

This is simply not true. What payment protection insurance, or PPI, is supposed to do is to ensure that the borrower is able to maintain their repayments in the case of illness, accident or being out of work. What many people are unaware of are the exemptions which mean in many cases they are not able to claim. There is absolutely no necessity to take out the cover and it should certainly not be a conditional part of the loan. In many cases borrowers’ already have cover in place to compensate them in the case of being made redundant. In the case of a borrower who is self employed or work on a sub-contract basis, they’d not be able to claim for the loss of their job anyway.

PPI providers are drawing in around £5billion per year for these products and the cost of claims is a very small proportion of this. They are using very different terms to describe what are virtually identical products and giving very little information on the exact nature of the them.

Citizens Advice had complained about the fact that the PPI providers were harmful to the interests of consumers. As the product was originally supposed to protect borrowers’ ability to maintain payments and avoid getting into debt and this was clearly not the case, they asked for some action to be taken. The Office of Fair Trading has looked into this and their subsequent report also shows that they found a great deal of difference in the prices being charged for PPI’s with costs ranging from £16 to around £40 for near identical cover. They did, however, find some evidence of good practice regarding the provision of pricing and clear information, but this was in a small proportion of providers.

More than 85% of providers of unsecured loans actually included the cost of the loan in the loan quotation, rather than showing it clearly as an optional extra.

It is thought that 60% of the cost of the product is paid out in commission fees, so it’s clearly a good earner for the sellers! A spokesman for one of the main insurance brokers, who has been canvassing for change in the PPI market, states that “Commission rates are being used by firms to inflate their profits and do no represent good value for consumers.”

The Office of Fair Trading plan collate feed back on its report shortly and will then consider and outline whatever action it is likely to take to improve the situation.

It is expected that the Office of Fair Trading will attempt to persuade companies to improve the products which they offer to their customers on a voluntary basis, in addition to setting up a code of conduct.

If this request were to meet with a refusal, the result could well be that a full investigation and recommendations would be handed to the Competition Commission or the FSA.

So, if you’re taking out a loan, there’s a lot of help and advice out there and it can be easily found by getting on line to an internet broker. They’ll sort through the maze of information and find the best deals. Remember, loan protection is not a necessity and if you do need it, you’ll receive the right advice and information.