Payment Protection Insurance under the microscope again

Posted in 'Personal Finance' by Richard Catlin

09 November 2007

The way that Payment Protection Insurance (PPI) is sold by lenders with loan products is to be investigated further by a special commission.

The Competition Commission has said that it needs more time to complete the investigation that it started back in February 2007 and that it aims to publish a provisional report in May 2008. The last report on PPI was undertaken by the Office of Fair Trading and entitled ‘Protection Racket’ which neatly summarises the findings of the OFT.

PPI covers the repayments on credit facilities, should the borrower be unable to meet repayments due to unexpected unemployment, accident, sickness or death. Many consumers come unstuck with the fine print in such policies - such as cover only coming into effect after 3 months – by which time the underlying loan is most likely to be in default.

PPI has been widely criticised by consumer groups, with countless stories of mis-sold polices, and a high cost in comparison to the actual cost of credit. Even in our Jargon Buster, we describe PPI as ‘fairly useless and expensive’.

The Competition Commission is seeking to clarify the situation on how exactly policies are sold and to establish the levels of competition at the retail level.

PPI is usually sold when a consumer takes out a financial product such as a personal loan, credit card or mortgage, and the Competition Commission is also seeking to determine whether consumers are routinely made aware of the full terms and conditions of their policy, or if they know that alternative and cheaper cover is often available from other specialist providers.

Many consumers incorrectly assume that if they elect to buy expensive PPI when they apply for credit, their chances of being approved will increase, but this is just not true. By law, failing to opt for such insurance cannot affect a credit decision.

We’ll be closely monitoring the outcome of the findings and will publish them on checkmyfile as soon as they are released.

In current market conditions, there are still a small handful of competitive deals to be had on personal loans – Alliance & Leicester offers one of the best deals available anywhere, with a typical APR of 7.8%. Backed by Santander, they’re a reliable and responsible lender. For those with a good or excellent credit rating, Zopa can be a good alternative with rates from 8.6% for larger loans of up to £15,000.

For most people, the cheapest source of loan finance at the moment is available from the Post Office. You need to apply for the Post Office credit card, then use the card to purchase goods or services up to £2,000, then you can switch that to a loan at a market beating 6.6%.