Ask Sindie: Loan cover: too big a bite from my apple?

Your money problems solved

Q. I've recently phoned most of the big banks and other lenders to compare the cost of a £3,000 personal loan. I'm hoping to use this to pay off credit card debts picked up during trips to New York.

Q. I've recently phoned most of the big banks and other lenders to compare the cost of a £3,000 personal loan. I'm hoping to use this to pay off credit card debts picked up during trips to New York.

My 0 per cent card deals have run out, and I want to cut down on my use of plastic. I would rather pay off the debt with something cheaper than the higher annual percentage rate (APR) of 13 on the cards.

But when asking about the cost of a loan, I have sometimes been given a monthly repayment figure that includes loan insurance.

It is only when I have raised this issue with staff that they have confirmed it and then given me a - lower - quote without it. Can they do this? Surely it's up to me to decide whether I want insurance or not?

I've put off taking out a loan for fear that it will work out more expensive than the credit cards.
BS, Glasgow

A. Loan cover, known as payment protection insurance (PPI), is a hot potato for the financial services industry.

Now being investigated by the Financial Services Authority (FSA), the City regulator, the insurance is designed to cover borrowers' repayments should they be unable to work due to illness, injury or unemployment.

The sale of PPI - and its alleged mis-sale by commission-hungry sales staff - has sparked protests by consumer groups. They claim that lenders sell the cover for profit, regardless of whether it is suitable for customers.

These concerns are shared by MPs too: members of the Treasury Select Committee are keen to launch their own investigation.

As well as being linked to unsecured personal loans, PPI can be bought to cover repayment of credit card bills and mortgages.

A report by the investment bank Credit Suisse First Boston (CSFB) last month revealed how much money banks and other lenders were making from the sale of PPI. The insurance represented more than 10 per cent of profits at both Barclays and Lloyds TSB, the report suggested.

Critics of the cover say it is too expensive and that it has exclusions that make it worthless to many who buy it.

In January, financial analyst Moneyfacts showed the enormous difference that PPI can make to repayments on a £5,000 personal loan over three years - and also the disparity between premiums charged by different lenders.

For example, the cost of a loan repaid over three years with Liverpool Victoria friendly society, at an annual percentage rate (APR) of 6.5, was an extra £552 with PPI. But the same sum lent by Northern Rock building society at a lower APR of 5.8 actually cost more - £637.20 - with PPI.

At Bank of Scotland, where the same loan had an APR of 10.9, the extra cost was £1,383.84 - more than double the price of the cheapest deal.

As a report last week from the investment bank Morgan Stanley highlighted, loan cover in effect means customers pay a much higher APR. The added extra cost makes a mockery of the headline rates of interest flagged up by lenders. And in any case, the insurance is useless if it doesn't pay out.

Although the detail varies between providers, insurers will usually not pay out if you're off work with stress - the biggest cause of absence from the workplace- or if you're self-employed. In many cases, the borrower may not have known about these exclusions because they weren't told of them during the sales process.

Most bank PPI policies also have an excess period of 60 days and won't make the first payment until two months after the claim.

The consumer group Which? has repeatedly urged borrowers to be wary of PPI and to check whether they really need to take it out. For example, many employers will offer adequate sick pay for at least six months, or the borrower may already have an income protection policy.

Since January this year, the sale of PPI has been regulated by the FSA, and consumers taking out the cover with a personal loan will now receive documents explaining all the terms and conditions.

But Which? has expressed concern that, despite the new rules, it is possible that banks will still mis-sell the cover.

Your experience with telephone sales staff shows there is still some way to go.

Every lender should make it crystal clear whether the loan quote includes PPI or not; the onus is not on you.

It should also be made clear to you that the insurance is not compulsory; the decision is yours, regardless of what sales staff may say, and your loan's approval does not depend on it.

The CSFB report picked up on this, noting that consumers often bought PPI without realising it was optional.

Before you dismiss it, the cover does have its uses and can offer peace of mind. But check all the terms of the policy: it may well be that you won't benefit from it.

Alternatively, you could buy standalone loan insurance, from a broker such as Burgesses, which will offer protection for your £3,000.

If you need help from our consumer champion, write to Sindie at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@ independent.co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.