Loan companies have been accused by the Citizens Advice Bureau (CAB) of mis-selling payment protection insurance (PPI).
PPI will pay out if borrowers are unable to make monthly repayments due to job loss or illness on a loan, credit card, hire-purchase or mortgage. But the CAB says the insurance is often very expensive and designed to exclude many of the most common situations that can lead to debt problems and is mis-sold to people who cannot possibly claim on it.
It is estimated that there are 20 million policies in force which produce an annual revenue in excess of £5 billion. But CAB research found that 85 per cent of its clients who had claimed on PPI had their claim turned down. It believes that in many cases the sale of this insurance is more about providing an additional source of profit from the financial services industry than about protecting consumers and it is making a “super complaint” to the Office of Fair Trading (OFT), calling on them to launch an investigation in the business. It is also calling on the industry to develop good minimum standards of cover.
David Harker, Citizens Advice chief executive, said: “Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times.”
What are the problems?
The CAB has highlighted a number of problems with PPI and found that pressure sales or inertia selling are used to force people to take out insurance that they cannot afford. It has found that policies sold by several mainstream lenders exclude cover for common problems like bad back and mental health problems. Many also impose arbitrary age limits and ban the self-employed or those on fixed-term contracts from making a claim.
The premium paid can be equivalent to 25 per cent of the value of a loan and has to be paid for by borrowing more. PPI on some credit cards can increase the cost of borrowing by around 9 per cent a year.
Even where people are able to make a successful claim, the amounts paid out do not guarantee to keep them free from debt, particularly with credit cards as some insurance will only pay the minimum amount each month.
Harker says: “At best the excessive cost for minimal benefits makes it bad value for many people. At worst mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt. This is particularly worrying at a time when personal debt levels are escalating.”
Should you take it out?
PPI is usually offered to you as you take out a loan or card, but you don’t have to take it. If you think cover is a good idea, compare what is on offer with other policies on the market to make sure you are getting the best deal. The British Insurance Brokers Association (BIBA) says that premiums can differ by more than 200 per cent.
And Moneyfacts has worked out the cost of insurance on a £7,500 loan over five years from major lenders and has found that the cost of taking out insurance over this period can vary by £1,200. For example, the monthly insurance cost on loan from Nationwide Building Society is £23.02, which is £1,381.20, over the term of the loan. At the top end, Royal Bank of Scotland charges £43.10 a month which is £2,586 over the five-year term.
BIBA supports CABs call for an investigation but believes that PPI can offer valuable cover. “You may find that you can’t keep up with repayments for a variety of reason that are out of your control, such as losing your job,” says Peter Staddon, head of technical services at BIBA. “However, the quality of cover provided by policies and the premiums charged can vary dramatically, so it pays to shop around,” says Staddon. He advises going to an insurance broker to find appropriate cover.
Samantha Owens of Moneyfacts.co.uk, says: “With all the furore at the moment, it is important to remember that when you take out a loan insurance cover is not necessarily a bad thing. Insurance can be invaluable, for example, should a borrower be unable to meet monthly repayments due to ill health. But cover can vary dramatically and consumers must check that they will and won’t be covered for and then shop around and compare costs.”
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