Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is a type of insurance which is sold alongside loans and credit cards. The purpose of PPI is to protect the buyer from the financial consequences of failing to make loan repayments. The plans ensure payments are made even when the borrower is unable to make them due to sickness, unemployment, or other unforeseen costs. PPI is widely sold by banks and other credit providers as an add-on to the loan or overdraft product. The PPI premium is often charged up front in a lump sum, called a ‘single premium’, which is added on to the overall price of the loan. Customers will then make monthly payments towards the cost of the insurance which are effectively additional loan repayments (with interest added, of course!). This means, of course, that consumers can’t just stop PPI payments. Instead, they have to secure a refund, which may either be refused or offered at an extremely low price.
The insurance was initially introduced as an added extra that customers concerned about their ability to pay in the future could purchase to protect themselves (hence the name ‘payment protection’). However, in practice this hasn’t always been the case, causing controversy (more on that below). Credit insurance can be purchased to insure all kinds of loans you might choose to take out, including car loans, business loans, and home mortgage borrowing. Make sure you don’t make the common mistake of confusing payment protection insurance with income protection insurance. While the former is only for loans, the latter is not specific to credit but covers any source of income.
There has been a great deal of scandal in the news recently concerning the alleged mis-selling of PPIs – errors which are thought to have occurred on an industry-wide scale. Credit protection insurance was being sold to customers who would be unable to claim for it in the first place – for example, those who are classed as self-employed or the retired. The Finance Ombudsman Service said it received ‘hundreds of thousands’ of complains about PPI. Since then, the Financial Services Authority has passed legislature which requires banks to scan their databases for PPI policies which were mis-sold, and then to inform policyholders that they may reclaim the premiums they paid. Critics say the banking industry began aggressively selling PPI to customers after realising that the policies were highly profitable. Some businesses added PPI automatically, unless the consumer “opted out”. Others deliberately made it difficult for consumers to see exactly what they were signing up to, for example, including the details about PPI in small print. The plans were often expensive, with premiums often adding in excess of 20% to the cost of a loan. Many banks found themselves only having to return about 15% of their PPI income to their claimants – a situation partially aided, of course, by their deliberate misselling of the protection plans.
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