When you're picking a personal loan, you will be offered loan insurance. These policies are normally a rip-off.
This article has already been sent to Fools as part of our 'The Good, The Bad and The Ugly' email series.
Habitual readers will know that Fool.co.uk has a very low opinion of payment protection insurance, alias PPI.
In theory, PPI should offer valuable protection to borrowers who hit hard times. If you can't pay your mortgage, loan or credit-card repayments because of an accident, sickness or unemployment, then PPI picks up the tab. Likewise, if you die, then life cover will repay your loan or card debt and leave your family in the clear.
Alas, the market for payment protection insurance has been ruined by greedy lenders, who make vast profits from charging a fortune for this cover. Furthermore, these lenders offer policies which are riddled with small print, loopholes and get-out clauses, enabling them to reject a large proportion of claims.
Thus, what started out as a great idea has been corrupted by a predatory cartel of lenders and insurers. Let me give you proof, using personal loan PPI as an example (data taken from the Fool's independent, unbiased loans search):
Three Best Buy personal loans
(to borrow £5,000 over three years, with and without PPI)
Lender | Interest rate (% APR) | Total amount repayable (£) | TAR with PPI (£) | Cost of PPI (£) |
|---|---|---|---|---|
Barclaycard and Masterloan | 6.8 | 5,528.52 | 6,346.08 | 817.56 (14.8%) |
Yourpersonalloan | 6.9 | 5,532.48 | 6,315.99 | 783.51 (14.2%) |
Source: Fool.co.uk and lenders' websites
The fourth column shows the total amount repayable (TAR) for these three loans with payment protection insurance added. As most major lenders offer a menu of PPI policies, I have included standard or mid-range policies.
It's important to note that I'm not attacking these three lenders in particular. My protest involves the whole loan-insurance market, not these specific banks. Nevertheless, by adding PPI to the above loans, you turn them from Best Buys into Don't Buys!
I used to work in the PPI market for more than a decade. Hence, as an ex-insider, I know the true cost of providing this protection -- and it's a lot less than you think. In fact, loan PPI can be sold profitably and yet add less than 4% to your monthly repayments. Therefore, the above PPI policies cost three to five times as much as they need to. Shame!
Therefore, my advice is NEVER buy PPI from a lender. Instead, shop around for a stand-alone policy from an independent provider, such as award-winning Fool partnerBritish Insurance. Otherwise, your perfect personal loan will mutate into a nasty nightmare!
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