Big dodgy blokes called ‘Arry have one thing in common with banks, they're both in the ‘protection business'. Financial service providers push borrowers to get their loan insurance, which means you're unknowingly paying £1,000s more. Yet you can slash the insurance cost of new and existing loans by up to 90%.
What is PPI?
Payment Protection Insurance (PPI) is seen by many as a welcome comfort. You pay a monthly premium, and then your loan repayments are covered, usually for a year, if you're unable to work due to accidents, involuntary unemployment or sickness. Some also include full repayment if you die.
Do you need it?
When getting a new loan, first decide whether you actually need PPI. Go through this checklist, to work out if you actually need a policy:
- Are you covered by another policy (such as income protection)?
- Do you have savings which would cover any repayments?
- Would relatives or friends be able to help you out?
Answer yes to any of these, and you may be better off without PPI, as it can be expensive. In general, I'm not its greatest fan, but it does sometimes have its place.
Was your policy sold correctly?
Some people will have bought polices that are not suitable for their circumstance. For the self-employed, the unemployment element is commonly useless, as most policies' self-employment benefits are poor. Even if you're not self-employed, always read policy terms to check suitability.
Often, there are specific exclusions that may affect you or that you were not told about before you purchased the insurance. If you think this applies to you, see the PPI Reclaiming guide to see if you can reclaim the cost of your insurance.
Can I get PPI from my lender?
Yes, but that doesn't mean you should. Lenders advertise loan costs by quoting interest rates, yet this doesn't include the insurance cost, allowing some to play a sneaky trick. They keep the loan cheap, and load all their costs on the insurance. This way they can advertise cheap rates, but push unsuspecting customers to take out the expensive insurance.
Worse still, unless you specifically request a loan without PPI, some sign you up automatically, so it's possible to have PPI without even realising it. This hidden insurance cost makes a big difference.
PPI – An example of just how expensive it can be
At the time of writing (it will change, this is just an example to show you):
If you borrow £10,000 over 5 years from the AA at a low 6% rate, it'll cost just under £195 a month, but with PPI it'd be just over £260, meaning the insurance adds £65 a month or £3,900 over the life of the loan.
Whereas Leeds Building Society's insured loan advertises a higher rate of 6.9% but has much cheaper insurance; it comes in at £220 a month – therefore its PPI adds just £23 monthly or £1380 over the loan's life.
Get PPI much cheaper
An increasing number of companies are beginning to sell standalone PPI policies, which can be used to protect any loans you've taken out much more cheaply than lenders' own insurance.
If you're going to do this, make sure you're not double-covered. Uncheck the payment protection box on your loan form, and then go direct to one of these online insurers.
Getting the right cover
There are a few variations on the theme with PPI providers, and two basic choices you need to make when choosing which one is right for you.
- Type of cover. You can cover yourself for all or some of the following: accidents, sickness, unemployment, terminal illness and/or death. The more of these you want covered, the more expensive the policy is.
- Excess period. Policies normally start paying out 30 or 60 days after the problem occurs, yet many of the best value are now ‘back to day one', which means they backdate the benefit so you'll be paid for the earlier period too.
Can you foresee redundancy?
One element of PPI is covering you in the event that you lose your job. Yet if there is already what's called a 'foreseeability' of redundancy - in essence you know your job is directly under threat when you take out the policy (or often within the first few months) - then often this is invalid.
This is very important to check. Unfortunately definitions of 'foreseeability' vary. There's the chance that when you come to claim, insurers may disqualify the cover, arguing unemployment was foreseeable, even for tangential reasons - for example, your industry is threatened by a recession.
In the current economic climate, it’s sensible for everyone to take a moment to think how they’d be impacted by redudancy; and if possible put a contingency plan in place. See the full Redundancy Guide for hints and tips.
The golden rule
If you're taking out PPI, there's one thing you should always do, even with the cheaper, more reputable, standalone providers:
The cheapest PPI providers
The cost is defined per £100 of your monthly repayment. So £5 per £100 means if your loan repayment is £200 per month, the PPI will cost you £10. Most standard PPI policies cost £10-£30 per £100.
Policies are split into those which vary quotes based on your age, and those that charge a flat rate for all applicants. The following are the cheapest 30-day payout, back to day one policies, for full ASU (if you're looking for just unemployment or just accident and sickness, these are still the winners).
What if I've already got expensive PPI?
If you already have a loan with PPI, some lenders allow you to cancel it while keeping the loan – and since regulatory changes last year, this is becoming increasingly common. This means it's possible to switch PPI to a standalone provider without changing the loan; useful for people whose credit score has deteriorated or face redemption costs for the loan itself.
Lenders mightn't make it easy though. They can delay on giving illustrations, and most customer service reps fail to understand the issues. Some banks simply don't allow separate PPI cancellations at all.
It does seem as though more lenders are currently making the move towards a more flexible policy, but this may not apply to a policy you took out a few years ago, so always check your own terms and conditions or ask your lender.
Most new policies are void if there was a forseeability of redundancy at the time they were taken out, so don't change policy if this is your situation. For more information, see Cutting The Cost of Existing Loans.
Where you can cancel separately, it's worth remembering that the amount of your rebate will not be pro rata. Instead, it will depend on the length of your loan and the period of time that passed when you ask to cancel.
Using these policies can save substantial cash. Take a £10,000 five-year loan with Tesco and the insurance alone adds an extra £42 a month. That's £2,520 over the life of the loan. This is roughly average, yet a 35-year-old could get full cover with a standalone PPI provider for just £8 a month – that's £480 over the life of the loan; a saving of £2,040.
|Monthly repayment||Extra PPI cost||Total repayable||Saving|
|Personal loan with own PPI||Tesco|
|Loan with standalone PPI||Tesco with Paymentcare|