Loan repayment – watch those extras!

Following a complaint made by Citizens Advice in 2005, claiming that aspects of the payment protection insurance (PPI) market were severely harming the interests of consumers, a report has been published by the Office of Fair Trading.

Payment protection insurance is designed to safeguard borrowers’ ability to keep up loan payments and in theory it should make it easier to avoid getting into debt. If the borrower suffers an illness, an accident or loses their job, then PPI should step in and pay out for a specified period of time. It appears that borrowers’ are not being made aware of exclusions which may mean that they can’t make a claim.

In addition to these omissions, it appears that borrowers’ have no true idea of the real cost of cover and do not receive suitable information on the product.

What is making matters worse is that providers are using an assortment of very different terms for the same products.

Not all borrowers need the protection that these policies offer. Prior to taking out the loan they would not have considered the purchase of additional insurance and it is a fact that almost 90% of unsecured loan providers automatically calculate the cost of the PPI in the full figures for the loan. If you apply for a personal loan you are likely to find an amount for PPI added to the bottom of the calculations and may even assume that this is a pre-requisite, which could be taken as misleading.

The Office of Fair Trading revealed that the variance in the prices were not relative to the cost. There were cases of virtually identical policies costing from £16 to around £40. Product providers seem to be doing very well out of selling the cover, with the cost of claims showing as a very small proportion of the annual income of £5 billion which they receive from premiums.

In the PPI industry as a whole, the Office of Fair Trading was not happy with regards the provision of clear information on PPI prices, although this was not totally the case. It was commonly found that marketing literature was on display without any indication whatsoever of costs.

When taking out a loan, 25% of borrowers’ had the mistaken impression that by taking out a payment protection plan, their application for credit would be viewed more favourably. Sales agents earn a considerable income from the sale of the product and commission of 60% of the product price is common. An amazing 7.5 million PPI policies are sold every year, despite the fact that they are unsuitable for a great many borrowers’ and many of them are incredibly expensive. A feed-back session on the Office of Fair Trading report is being held. Further action is then expected and this is very likely to result in them offering encouragement to companies to improve the product which they offer to their clients. Plans are then likely to be put in place for a code of conduct. These moves would be on a voluntary basis.

In the event of companies not complying with whatever moves are proposed, it is possible that a full investigation and recommendations could be handed to either the Financial Services Authority or to the Competition Commission.

In the meantime, remember that this is a purely voluntary form of insurance. Cover for accident, illness or loss of job can be found in other forms. Indeed it is likely that many borrowers’ who have paid for this expensive cover are already amply insured via other products.

Check the facts carefully. It’s your money.