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AT LAST,A GBP5BN RACKET FACES REFORM
(The Mail on Sunday Via Thomson Dialog NewsEdge) Better late than never. For the past year, Financial Mail, supported by our sister website thisismoney.co.uk, has highlighted the unsuitability of expensive payment protection insurance for many borrowers.
Now the Office of Fair Trading, headed by chief executive John Fingleton, is questioning the value of these policies.
PPI kicks in when borrowers are unable to pay their credit card or loan bills because of sickness or unemployment.
But in practice, because of the exclusions in most policies, it rarely does.
It means that lenders can cash in from insurance that generates annual premiums of GBP5 billion. For borrowers, it can mean an unnecessary burden.
The OFT plans to reform the selling of the policies and come up with recommendations by the end of the year. To help, Financial Mail suggests several solutions to difficult areas.
PROBLEM: Misleading offers MANY lenders offer eyecatching deals, designed to attract consumers tempted by the thought of a low-interest loan.
However, the reality can be very different once PPI is added to the deal - as most lenders insist.
A loan with a seemingly low rate suddenly becomes far more expensive once PPI is taken into account.
Research by consultancy London Economics found that with 37 out of 40 loan providers, including the PPI premium in the repayment calculation led to an increase of more than 100 per cent in the advertised APR (annual percentage rate).
SOLUTION: Consumers should be given two APRs - one for a loan without payment protection and one where it is factored into the cost. This will avoid confusion.
PROBLEM: Hiding the cost of PPI MOST lenders provide little information about the cost of protection. As a result, most customers do not realise how expensive it is. Research carried out earlier this year by thisismoney.co.uk revealed that banks were bumping up the cost of unsecured loans by more than a third when PPI was included. Shockingly, nearly 90 per cent of unsecured loan providers contacted by the OFT automatically included protection in their loan quotes without saying so.
SOLUTION: Customers should be given an accurate breakdown of just how much PPI adds to the cost of the loan, both in terms of extra monthly payments and over the life of the loan.
PROBLEM: Lack of transparency BUYERS of PPI receive poor information on what their policy does and does not cover.
Not one of the unsecured loan providers contacted by the OFT as part of its study mentioned exclusions until asked by the caller.
SOLUTION: Consumers should be given a clear breakdown of what is covered and what is excluded before signing.
PROBLEM: Wide-ranging value for money THERE is a huge difference in the cost of policies. The OFT found the monthly cost of protection on a GBP5,000 unsecured loan over five years was GBP16 to GBP40.
Analysis by the London Economics consultancy for the OFT found that the most expensive policies were four times dearer than the cheapest.
The number of people who claim on their policies is also low - just 17 per cent. This compares with claims ratios of 74 per cent for motor insurance and 55 per cent for household insurance.
SOLUTION: Borrowers should be actively encouraged to shop around for the best deal. Loan providers selling it should be required to tell borrowers that cheaper PPI options are available.
Standalone cover from brokers such as Paymentcare or britishinsurance.com typically costs a fifth of that charged by the big banks, with cover between GBP4 to GBP6 for every GBP100 insured.
PROBLEM: Single premium cover MOST banks and building societies-offer single-premium PPI.
This means the cost of the cover is added to the loan upfront, increasing the size of the debt, with consumers paying interest on both the insurance and the loan.
Not only does this boost profits for providers, but borrowers can end up paying for cover they do not have.
Because PPI pays out for only a limited period, typically 12 months, customers who claim are left unprotected after cover runs out, regardless of whether the loan is still in place and monthly payments still have to be made.
The OFT says single-premium policies act as a ' disincentive' to people switching to a more competitive policy because they are unlikely to receive a pro-rata premium refund if they cancel.
SOLUTION: Providers should be required to offer regular premium insurance, which can be cancelled if cover is no longer needed without any financial loss to the consumer.
It should be kept separate from the loan so that consumers do not pay interest on the premiums.
Hidden fees push up cost of car loan BRETT Haslam found out just how expensive payment protection insurance can be - when he decided he did not want it.
The computer expert applied for a GBP4,700 loan from Advantage Card Finance to buy a new car. But he was shocked to be told that the monthly repayments over three years would be GBP204. When Brett, 34, checked, he found the quote included payment protection of GBP59 a month.
Without it, monthly repayments on the loan would have been GBP145. But when he told Advantage he did not want PPI, it said he was a high risk and that his rate would have to go up if he insisted on not taking out PPI. It quoted him a monthly repayment of GBP196 without it.
Brett, of Bolton, Lancashire, says: 'I did not want to take out its cover, especially when I knew I could get it cheaper elsewhere.' He searched online before taking out PPI with standalone provider Paymentcare.
For GBP8.80 a month, it covers his loan. And after again raising the matter with Advantage, it reduced its rate and he now pays it GBP160 a month in repayments.
Copyright 2006 The Mail on Sunday.
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