Loan insurance: don't push the boat out

As banks tempt us with cheap deals on big purchases, they're also trying to talk us into protecting our repayments. Does this bring security, asks Sam Dunn, or is it a rip-off?

It doesn't matter if it's for a luxury cruise, a tummy tuck or flashy car - prices are low and you should get one while you can. Unless you have buried your head in the sand for the past six months, that's the message you'll have been battered with in adverts for personal loans on TV, radio and the internet, in the street and across your newspaper.

It doesn't matter if it's for a luxury cruise, a tummy tuck or flashy car - prices are low and you should get one while you can. Unless you have buried your head in the sand for the past six months, that's the message you'll have been battered with in adverts for personal loans on TV, radio and the internet, in the street and across your newspaper.

With annual percentage rates (APRs) as low as 5.8, they're selling like hot cakes, according to Richard Mason of moneysupermarket.com, the financial information website.

Demand has surged by 60 per cent in the past year: "Our website is seeing 6,000 applications for personal loans each day," he says.

Churchill, the insurer, estimates that the UK's personal loan market was worth a staggering £80.2bn in 2003.

Finding a competitive deal is simple - an internet search yields a hatful of offers on low APRs, some with payment holidays.

But before you buy the loan, you'll have to decide whether to insure your repayments. These monthly premiums - known as payment protection insurance (PPI) - cover you if illness, accident or unemployment leave you unable to meet your commitment.

Two out of three of us tick the box and take the insurance, the industry estimates. Yet more of us should stop to consider the expense. PPI can add hundreds of pounds to the cost of a loan and industry opinion is divided over its value, although regulation in 2005 will mean clearer on costs for consumers.

Mr Mason calls the insurance "a complete rip-off" and warns that lenders are more desperate than ever to make money from personal loans.

Ferocious competition has kept the cost of loans down, while Bank of England interest rate rises have squeezed lenders from the other side. "It's now even more important" that PPI is sold, says Mr Mason.

Loan insurance is just another product that preys on our desire for peace of mind, says Sue Hannums at independent financial adviser (IFA) Chase de Vere. "The PPI is sold to us rather than bought; banks make a lot of money from us taking this out."

But lenders stand by the cover, insisting that it is useful.

Alliance & Leicester's website, for example, has a page of "frequently asked questions" about personal loans which warns readers that "over 500 people are made redundant in the UK every day, and 60 per cent of unemployed people are out of work for six months or more".

So who's right about PPI? And should you bother to take it out?

The first thing to watch out for is a loan quote that automatically includes PPI. Insurance broker Stoke has unearthed evidence that many lenders routinely incorporate insurance in their quotes. Worse, this cover is, in many cases, "nothing short of a scandal" because of many exclusions, it says.

Stoke's survey reveals that loan salespeople fail to ask relevant questions about, say, a customer's medical history or whether they are self-employed. This is crucial information because a part-time job, an existing serious illness or short-term employment can exclude people from making claims on their policy.

"You have to know what you are buying with the loan insurance. Some of the [terms] can be very strict," Ms Hannums says.

Alliance & Leicester's website, for example, lists "main exclusions" - such as illnesses that you knew about before taking out the loan - but a full list is only available on request.

Check also to see if the PPI will cover repayments for the life of the loan or might run out after, say, a year.

For example, if you can't make your Lloyds TSB loan repayments because of an accident, you'll be covered for the term of the loan. Become unemployed, however, and the cover only lasts for 12 months.

In the midst of all this, ask yourself whether you really need PPI anyway. If you meet certain criteria, you probably don't. With savings worth six months' salary and a decent sick pay scheme at your employer, "you should probably have enough" says Ms Hannums.

And if you are self-employed, an income protection policy should offer adequate cover - and can provide for mortgage payments too.

Watch for the time lapse, though, says Ms Hannums. "Income protection doesn't pay out straight away - the wait can be considerable. If you go for cheaper cover with a 26-week wait before any payout, you'll need resources to be able to pay during this time."

If you still want to cover your loan with insurance, at least ring around brokers to see if it will come cheaper than from the loan provider.

Don't forget you can cancel the PPI if you change your mind; typically, there is a "cooling-off period" of 30 days from taking it out.

The Financial Ombudsman Service says it had about 800 PPI complaints last year - a small percentage of overall grievances - and that 40 per cent of those were upheld.

Start your day with The Independent, sign up for daily news emails
New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Kellie Bright as Linda Carter and Danny Dyer as Mick Carter

EastEnders Christmas specials are known for their shouty, over-the-top soap drama but tonight the show has done itself proud thanks to Danny Dyer.

Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
art
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
tv
Life and Style
fashion
Sport
sport
Arts and Entertainment
Call The Midwife: Miranda Hart as Chummy
tvCall the Midwife Christmas Special
Sport
Laura Trott and Jason Kenny are preparing for the Commonwealth Games in Glasgow
sport
Arts and Entertainment
Sir Bruce Forsyth with Tess Daly in the BBC's Strictly Come Dancing Christmas Special
tvLouis Smith wins with 'Jingle Bells' quickstep on Strictly Come Dancing's Christmas Special
News
news
Arts and Entertainment
tv
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there