COMMENT
Loan Protection Comes At A Price

This month is one of the busiest times of the year for banks and other providers of personal loans.

In January alone, more than half a million people arrange a personal loan. On average, roughly 17,500 loans per day are approved this month, with around £130 million borrowed each day. That's a lot of cars, holidays, weddings, home improvements and debt-consolidation loans!

Unfortunately, although many people will happily shop around for a personal loan, few people stop to look at its true cost. Almost all borrowers compare loans by checking the interest rates on offer, known as the APR, or Annual Percentage Rate. This is a mistake, because APRs don't give you the whole picture.

A far better way to compare the cost of loans is to look at the TAR, or Total Amount Repayable. This tots up the amount you have borrowed plus all charges for credit, which gives you an accurate of what you'd have to pay back. Remember to use APRs simply as a guide - only TARs tell the whole truth!

Another problem is that payment protection insurance, often known as personal loan protection (PLP), can hugely bump up the cost of a loan. PLP pays off your loan if you die, plus it meets your monthly repayments if you are unable to work due to accident, sickness or unemployment. Although this protection is optional, around seven out of ten borrowers are cajoled into buying it, often using high-pressure and "assumptive" sales techniques ("add it on - they won't notice!").

Today, I checked the cost of a loan of £5,000 over three years from sixteen leading lenders, with and without PLP. Here are the results, sorted by the Total Amount Repayable for a protected loan:

These are the cheapest loans offered by these lenders, usually Internet-only deals. Where more than one PLP policy is available, I have included a lender's mid-range policy. The data was taken from each lender's website on 25 January 2005.

As you can see, buying personal loan protection can add roughly £500 to £1,000 to the cost of an unprotected loan. Note that some policies are more than twice as expensive as others: The AA charges a whopping 19% for its "Silver Creditcare" policy, whereas Alliance & Leicester and Nationwide BS charge less than half this rate for similar cover.

As an ex-industry insider, I don't buy personal loan protection. Instead, if I had a personal loan, I would self-insure by putting aside the premiums saved each month, which come to between £14 and £29 a month. That way, if I didn't "make a claim" and avoided dipping into my "insurance fund", I'd have savings of £500 to £1,000 by the time my loan expired! On the other hand, if you feel that you need the peace of mind that PLP provides, choose a loan that doesn't charge the earth for this protection.

More: Check out the great deals in our personal loan centre | The Pros And Cons Of Personal Loans.