If you have dipped your toe in to the UK loan market in recent years you will have invariably come across the topic of PPI – short for Payment Protection Insurance. Claims of PPI being unjustly sold to consumers became such a big deal that even cold calls were made by companies promising to help you get your money back, even if you never took out PPI in the first place. However despite the controversy it remains a worthwhile option when taking out loans and credit, so understanding how it works (when sold properly) is another weapon in your loan application arsenal.
What Is PPI?
You may see PPI offered by lenders under various names, including loan repayment insurance, credit insurance, or credit protection insurance. The purpose of PPI is to cover the borrower should they fail to make repayments due to joblessness, illness, or other accepted circumstances. This insurance will cover repayments for a certain period of time, hopefully allowing the borrower to get their finances in order to continue making repayments. The duration covered is typically 12 months, but can vary depending on what you agreed and how much you have paid in to the policy.
The key thing to consider with PPI (as with any insurance) is whether you believe the amount you will pay is worth the risk of never having to invoke the policy, because in the long run you will be paying more on your loan.
There are two main types of PPI that you will be commonly offered on loans and credit. These are single premium policies that require you to make a one off lump-sum payment at the beginning of the loan term, or regular premium where you pay the insurance monthly.
Like the loan itself you do not automatically qualify for PPI and you will be assessed by the lender to see if it’s feasible. Because you will be required to pay more, this obviously rests on your ability to do so. Likewise if lenders fear you may end up missing payments, it is in their interest not to sell you PPI. However in such a scenario you are probably unlikely to get approved for the loan either.
To be eligible for PPI in the first place there will also be several basic requirements. This may include age restrictions and minimum working hours. It might also exclude the self-employed and those on maternity leave.
Although not sold by lenders, if you are looking for a way to protect yourself in the case that you cannot afford to make repayments on a loan or credit card, Income Protection Insurance is the most common alternative. This type of insurance usually pays out between 50% to 60% of your income each month, should you lose your job through no fault of your own – including injury or illness. This in turn will help you cover any loan or credit card repayments that would usually be affected by such a change in circumstances and might have been protected under a PPI policy.
Income protection may be more appealing than PPI as it insures your whole income, not just a single debt. For example if you had PPI on a personal loan but not your credit cards, losing your job is still going to be a struggle as you try to find funds to cover the card payments.
A similar option is critical illness insurance, which unlike income protection is paid out in one lump sum should you become too ill to work. It is commonly used in scenarios where the policy holder is ill enough to receive government benefits but still needs enough funds to cover larger debts like mortgages.
If you have ever taken out credit in the UK (from overdrafts to store cards) it is possible you were sold PPI without your knowledge or full understanding. It is easy to check if a policy existed by going through your statements and looking for terms like “loan protection” or “payment cover.”
If so you may be eligible to claim this back. Common miss-selling tactics included telling the borrower it was compulsory, the policy being opened automatically (mentioned in small print but not explicitly), or if you were self-employed or unemployed but this was excluded from the policy. If the lender has already been fined, your reclaim may be handled on mass without excessive paperwork.
To reclaim all you have to do is send a letter including your account details, the reason why you are reclaiming, and nay dates and relevant statements.