COMMENT
Cheaper Payment Protection Insurance

Anyone lending you money when you sign up for a loan or a credit card is very likely to do their level best to sell you Payment Protection Insurance (PPI) alongside it.

It's hardly surprising as they make a lot of money from you if you take it - sometimes up to a third as much again. As the independent comparison website, Moneyfacts, points out, the profit margin for banks on personal loans, for example, is small. With some lenders offering very competitive rates of between 5.5% and 6.0% APR, when you consider the base rate is currently at 4.5% then by the time you take bad debts into consideration there's not much left for them by way of a return.

They've got to make their money somewhere and PPI - which is designed to cover your monthly repayments if you lose your job or can't work because of accident or ill health, or pay off the debt if you drop dead - is how they do it.

However, the way PPI is sold has been strongly criticised recently by the Financial Services Authority and the consumer group, Citizens Advice, partly because of its pricing and partly because it's sometimes sold to people who don't qualify to claim on it. The Office of Fair Trading is currently considering whether to investigate the market.

So, what do you do if you really would like your credit card debts and loans covered by insurance? As Moneyfacts points out, standalone policies are usually far cheaper than those sold by your lender.

For a £5,000 loan over three years, both Paymentcare and Burgesses offer policies that are as much as £700 cheaper over the term than those offered by the High Street banks. And there's a good reason why they offer better value for money. Crucially, with banks and building societies, the full insurance premium is added to your loan balance at the start and interest is charged on it at your borrowing rate for the full term. With direct cover you can pay the premiums separately on a monthly direct debit with no interest charge so it inevitably makes the policy cheaper overall.

You're also free to cancel direct cover whenever you want without any financial penalty. With banks, because the premiums are front-loaded, if you repay your loan early, you won't get a pro-rata refund on your insurance premium.

Of course, if you fall sick or lose your job, it's not just your loans and credit card bills that need to be paid so a general income protection policy might be your best option. At the very least, set aside some savings to cover your monthly payments for a few months until you get back on your feet.