Payment Protection Insurance - Just Say No!

Banking and Borrowing

Updated on 16 December 2008 | 0 Comments

If there's one thing a lender is going to try and flog you when you're after a loan, it's Payment Protection Insurance. Here's why you shouldn't bother with it.

A few weeks ago the Office of Fair Trading published an interim report on their study of the payment protection insurance market. Suffice to say, they're not happy with the industry.

Up to 7.5 million PPI policies are taken out every single year, usually alongside personal loans, on the basis that it protects your ability to maintain repayments should you be unable to keep up your repayments due to accident, sickness or unemployment. It's a very lucrative market indeed which is why any bank or building society will do their level best to it to you whenever you borrow money.

Unfortunately, it's a murky market to say the least not least because it's very difficult to know whether you're getting value for money. For example, the Office of Fair Trading found that for a £5,000 unsecured loan over five years, monthly PPI payments ranged from £16 for the cheapest to £40 for the most expensive with very little obvious difference in the cover provided.

They also report that 27% of consumers were given the distinct impression by sales staff that taking out the PPI would help their application for credit when it should be completely irrelevant. Nearly all unsecured loan providers (87%) who were contacted by the OFT automatically included PPI in the quote for the loan which may imply to customers that it's not optional.

The claims ratio is also extremely low compared to other insurance products, in part because there are so many exclusions in the small print that prevent you from claiming.

If you're taking out a loan that is secured against your home then some form of payment protection might be worth thinking about if you have no other form of insurance against loss of income. After all, you don't want to risk losing your home. But be aware that PPI is available as a standalone product, which is generally competitively priced and far more flexible than a policy bought via your lender.

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