Summary
Every year, the loan industry earns £1 billion out of borrowers taking out payment protection insurance. The vast majority of borrowers never make a claim.

Payment Protection Insurance earns the loan industry £1 billion a year

Author: Anna Richardson

The loan industry is clapping its hands in glee as it receives

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over £1 billion a year from borrowers seeking to insure their loans. The Financial Services Authority (FSA) decided to look into Payment Protection Insurance (PPI) and find out more about the way that lenders convince people to take out this type of insurance. The investigation highlighted a number of worrying facts.

Before we progress, let's just explain what PPI is. It's an insurance that means if you take out a loan, and then find yourself unable to work because of accident, sickness or unemployment, the insurance will cover your loan repayments on your behalf. 50% of all borrowers sign up for PPI when they take out the loan.

The Department of Trade and Industry has uncovered a fact that highlights just how much money is being wasted, as only 4% ever make a claim, and only 25% of those claims are rejected, which means that in total, only 3% of people with PPI ever make a successful claim. The FSA found a few reasons why borrowers were signing up so readily:

• around 50% of the loan providers surveyed did not ( car insurance policy ) satisfactorily explain to borrowers the many exclusions that could stop them from making a claim. This meant that people unsuitable for the insurance were still signing up.

• some lenders were not making it clear to the customers that they did not have to take out the insurance to get the loan. A common trick was to add the PPI to the quotation without actually pointing out that the insurance is optional.

• some lenders were adding the entire cost of the PPI for the duration of the loan to the first payment. This means that the insurance was paid before the loan itself, and the borrower had no option to cancel the insurance because it had already been paid.

It has also been noted that in the industry there is a huge disparity in price. Simon Burgess is Managing Director of British Insurance Ltd, and he looked into the issue of price, discovering that one of the big name, mainstream banks was charging a massive £30 a month per £100 of loan insured for PPI. Simon added that a few online quotes for the same loan would have uncovered rates of £4 - £6 a month. Price comparison service uSwitch has backed up these findings, so it's true, the most expensive monthly charge is nearly 500% more expensive than the cheapest deal - that's what we call being overcharged!

Click here for part 2