It’s big business for banks but bad news for millions of consumers.
INDEPENDENT ON SUNDAY - 7TH MARCH 2004
Take out a personal loan and it’s almost certain you will be offered loan protection. According to the sales pitch, this optional extra insurance will give you peace of mind if you are unable to meet your repayments. It may sound like the responsible thing to do but, in many cases, consumers who sign up are being charged hundreds of pounds for cover they don’t actually need.
Payment protection insurance as it is known is intended to pay out in the event of redundancy, serious accident or illness. But it doesn’t come cheap and policies often have many exclusions. Neither is payment protection insurance regulated by the Financial Services Authority, the City watchdog.
Yet loan insurance is big business. More than six million personal loans are taken out each year, nearly two-thirds of them with payment protection insurance according to industry estimates. But while payment protection insurance is sold by the truckload by sales staff in banks, evidence suggests they tend to be more interested in earning themselves commission than in customer protection.
In a survey, the broker Burgesses discovered that nine out of 10 high street lenders automatically include insurance premiums in the loan repayments they quote. Its researchers also found that loan providers regularly overlook crucial information, such as the customer’s medical and employment history, which could potentially invalidate any claims made on the insurance they sell.
“Loan protection is incredibly complex but it’s sold as just an add-on.” Says Ashley Sharpe, head of money research at the consumer magazine Which? “Peace of mind is important but there are other ways of protecting yourself.”
Michael Senior, head of products at independent financial adviser The Marketplace at Bradford & Bingley, agrees; “Loan insurance seems to be sold on a broad-brush approach but it really does depend on individual circumstances. You might have savings, an income protection policy or your company will have a standard sick pay deal in place. If you already have these things, why would you take out payment protection insurance?”
A typical £3,000 two-year loan with insurance will cost you hundreds of pounds on top of the interest incurred. The difference in repayments with and without insurance is particularly apparent on smaller loans, where banks lend money at a higher annual percentage rate to cover costs. For example, an £800 loan with insurance taken out over five years from Barclays will cost you £1428. Lenders will generally recommend arranging an overdraft facility as a cheaper way to cover borrowings of less than £1,000.
Barclays high-street rival HSBC challenges the critics of loan insurance. The bank says it paid out in 20,000 cases last year, and even claims that most customers hit by job loss or illness wouldn’t be able to meet their loan repayments without this cover.
So is payment protection insurance an unnecessary expense for you? Mr Senior says that much depends on whether you already have cover in the event of a crisis, According to the department for Work and Pensions, 85 per cent of employers offer more that the statutory sick pay; many will continue to pay your salary for around six months before the situation is reassessed. If your employer isn’t so generous, or if you are self-employed, an income protection plan is a cheap way to safeguard a loan, and will also cover your mortgage payments.
For £38.86 a month, Foresters friendly society will provide up to £1,000 a month in income protection for a 39 year old home decorator. Like most insurers, Foresters doesn’t pay out for the firs 13 weeks that claimants are off work sick, so make sure you have enough cash in an easy access savings account to cover this period.
“If you cannot get by paying your loan for three or four months, you probably have something wrong with your finances in the first place,” warns Matthew Morris, chief executive if IFA Rickman Tooze
If you still prefer loan insurance to income protection, make sure you look out for policy exclusions, he adds. “most people cannot be bothered to go into it, but you must scrutinise the details.”
Existing serious illnesses, a part-time job, self-employed or a short-term contract are all likely to exclude you from claims. Check also to see if your insurance covers repayments for the life of the loan or simply runs out after 12 months.
Note too that, while a claim will be paid within two weeks if you become ill or have an accident, if you lose your job, you are likely to have to wait 60 days.
Don’t forget you can also buy stand alone protection, which often works out cheaper. The broker Enhanced Wealth offer specialise loan insurance quotes £9.97 a month to cover a £3,000 loan from HSBC – half of what the bank charges. But check you are getting enough cover, and remember that some insurers impose conditions on policies of this type: Norwich Union only lets you take one out if you have a mortgage, for example.
A good place to look for loans and loan protection is moneysupermarket.com, the financial information website.
