FOOL'S EYE VIEW
Is Loan Repayment Protection Foolish?

By Jane Mack (TMFJane)
December 7, 2001

The other day I was happily surfing the Net, as you do when trying to find out some information (I was working, Boss. Honest!), when I came across this: 

We always advise customers to prepare for the worst. However small the chance, it's possible that you might not be able to make your monthly repayments due to unforeseen circumstances. That's why we ask you to think about taking out repayment protection - to protect your monthly repayments during your loan term.

• On average, 3.2 million domestic accidents occur every year. 46% of which are falls. (Source: Consumer Safety Unit, Mass Report 1996.)
• In 1991, 40% of people suffering from a serious long-term illness were under the age of 55. (Source: 1991 Census Data).
• Each year over 240,000 accidents happen on our roads - over 48,000 involving serious or fatal injuries. (Source: Dept of Transport, 1997.)  

I'm not particularly singling out the Nationwide for criticism since any bank or building society will do their level best to sell you payment protection insurance whenever you take out a personal loan. They make a lot of money from you if you do – sometimes up to a third as much again - so the 'hard sell' is understandable from their point of view. But the fact is you are paying your insurance premiums to the bank to protect them against you being unable to repay the loan. So whilst it may be great for them, it's not necessarily in your own interests to take them up on their kind offer.  

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 many loans are unsecured and, in these cases, people often find they're not quite as protected as they think they are.

It's the small print, you see. We don't like reading it so we don't check it properly but it usually boils down to the fact that you'd have to be practically dying to qualify under many loan repayment protection schemes or else be long-term unemployed. And your loan is only likely to be paid off if you actually drop dead. But they don't tell you that, of course. 

For example, you'll no doubt be told that the policy will cover your monthly payments for up to a year until you find a new job. Sounds good doesn't it? What you won't be told is that they probably won't pay up for the first couple of months of unemployment by which time you'll either have found yourself another job, or you'll be two months behind with your payments already. 

The same thing will probably apply if you fall ill. Most likely you'll be well again within the non-claimable period but, unless your employer has continued to pay you your salary, again you'll probably find yourself behind with the payments.  

Best of all would be to have a 'catch-all' income protection policy which would be much better value than taking out individual policies for many forms of borrowing. That way all your bills would be paid rather than just one of them. Some savings to cover your monthly payments for the period during which they won't pay out would also be sensible – you could put by the insurance premiums you've saved for a start.   

Even if you don't have savings or income protection, there are still other ways of dealing with the problem. At the very least it is possible in such circumstances to contact your creditors and negotiate reduced payments or a temporary freeze on the interest rate. Our Get out of Debt Centre offers lots of tips about how to go about it. 

Incidentally, a few months ago we persuaded a Fool to 'Live by the Book' for a month so that we could suggest ways of helping her to manage her finances a little better. She'd taken out a consolidation loan and had been persuaded to include payment protection which had added about 10% extra on to the total cost of the loan. I had a bit of a go at her about that and then thought 'Ooops!' when she was made redundant a short time later.  

Guess what! When she tried to claim it, she was told the policy didn't cover the first six weeks of unemployment and that she should re-apply if she was still unemployed after that time. Fortunately, she was able to use some of her redundancy pay to keep up with the repayments and also found herself another job fairly quickly. So much for the benefits of taking out payment protection insurance! 

Having commented on the Nationwide earlier, to be fair to them they're pretty clear on when they will or won't pay up. But for an example of a payment protection policy that is, shall we say, less than transparent, have a look at this one.

More information:  Personal Loan Centre   Insurance Centre