A guide to loan payment protection

There continues to be a lot of press surrounding payment protection insurance (PPI), and considerable interest from the regulators and Government appointed organisations.

What is Loan Payment Protection Insurance?

The concept behind this product is to cover loan repayments in the event that the borrower is unable to pay back the personal or secured loan, if an homeowner, if they fall seriously ill and are unable to work, or they become unexpectedly unemployed.

What are the advantages?

For those who borrow for the first time or exiting borrowers who wish to increase their debt, there is always the uncertainty that should circumstances change will future loan repayments, secured or otherwise be met? Payment protection insurance products in principle are designed to reassure borrowers that should certain life changing events occur as described above loan payments will be covered.

What the disadvantages?

There are always pros and cons with regard to such products, for example, taking out a PPI from some providers can be almost as expensive as the loan itself. In the course of 2005 and 2006, there has been a great deal of media coverage regarding alleged mis-selling of this type of product to unwary customers. Some complaints made to loan companies and the regulators alleged that the loan quote automatically included payment protection when in fact this type of product is optional and not mandatory. Other criticism of this type of insurance dwelt on the fact that the terms and conditions of some policies are too restrictive and don’t offer value for money, for example, some PPI’s exclude the self employed and will only pay out 6 months after the initial claim is made.

Summary

As with any type of insurance, a personal, or secured homeowner loan, always seek professional financial advice and establish whether or not this type of product provides you with the level of cover required for a reasonable payment. It is worth noting that it is not obligatory to take out the lenders recommended policy and in the same way many of us shop around for vehicle cover, there are plenty of independent Payment Protection Insurers happy to offer quotes. For more information consider visiting the Association of British Insurers.