Loan payment protection insurance scandal

Thursday, 13 October 2005 12:00

Banks are making hundreds of pounds on the cost of loans, by selling consumers their own payment protection insurance.

While the cover does serve a useful purpose, by taking out a policy from an independent provider rather than the lender consumers can save more than £700 on the cost of a £5,000 loan.

"If anyone is thinking of taking out loan insurance with a high street lender, they should think twice before making such a decision - as there is an opportunity to save hundreds of pounds and there's no catch," said Andrew Hagger, of independent price comparison service Moneyfacts.co.uk.

"The profit margin for banks on personal loans is small. There are a number lenders offering very competitive rates of between 5.5 per cent and 6.0 per cent APR, but when you consider base rate is currently at 4.5 per cent, by the time you take bad debts into consideration there's not much left for them by way of a return," he explained.

"This is the reason that lenders encourage their staff to cross sell payment protection insurance as this can be extremely profitable to them. In some cases, bank staff are targeted to sell this cover and have the opportunity to earn a financial bonus. However, the downside so far as the consumer is concerned is that, in some cases, this can lead to a 'hard sell' approach and the insurance sale not being made for the right reason, i.e. the needs of the customer.

"When you look at the cost of cover provided by standalone brokers, such as paymentcare or Burgesses, it is clear to see why lenders are keen for their staff to sell this insurance to customers wherever possible."

Figures from Moneyfacts show that on a £5,000 three-year loan a borrower can save £711.36 by taking payment protection insurance as a standalone policy rather than as part of their loan - effectively making the loan more than £20 a month cheaper.

Other reasons for taking payment protection insurance from a direct provider rather than your lender:

• With the banks/building societies the full insurance premium is added to your loan balance and interest charged on it at your borrowing rate for the full term.
  
• With direct cover you have the flexibility of paying the premium separately as a direct debit from your current account with no interest charge and are free to cancel it when you wish without any form of financial penalty.
  
• If you repay your loan early you will not receive a pro-rata refund on your insurance premium as the premiums are front loaded, in fact if you repaid a five-year loan after four years, the refund you would receive would be negligible.
  
• There is no pressure to take out standalone payment protection insurance, the customer is in the perfect position to know their financial position and job security position and can choose the type of cover that they feel best meets their circumstances.
  
• The cover doesn't have to be taken out at the start of the loan.

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