Loans: Payment Protection Insurance
Whenever you apply for a loan, you'll be asked if you want to take out payment protection insurance. Beware as it's usually expensive and inflexible.
Payment Protection Insurance (PPI) has come in for a lot of stick in recent years, and rightly so. In theory it funds your monthly repayments if you can't work thanks to accident, sickness or unemployment, or pays off your loan if you die. But it's very expensive. For example, it can add £500 to £1,500 to the cost of a three-year loan of £5,000.
Because PPI generates such massive profits for the loan industry it's usually sold very hard. Standard online loan quotes will often state the cost including PPI by default and only let you obtain a quote without PPI after dire warnings.
The Office of Fair Trading and the Financial Services Authorithy have recently issued damning statements about the mis-selling of PPI. It's been sold to many self-employed people, even though they are usually unable to make a claim due to exclusions clauses included most policies. Some companies have even suggested that loans will be refused unless you take out their PPI policy, which they are not allowed to do.
As it happens only a minority of borrowers ever make a claim under these policies, you'd probably be better off not paying the premium and, instead, putting a little extra aside to cover life's little emergencies. Alternatively, if you must have this peace of mind, shop around for a stand-alone policy from a low-cost provider or consider buying income protection insurance, which will cover all your outgoings rather than just your loan payments.
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Published on November 17, 2006
