The Pros And Cons Of Payment Protection Insurance

Lenders are always eager to convince borrowers to protect their repayments for loans, credit cards, store cards, mortgages and other financial products. And they have a point. People in the UK are saving less and borrowing more, with a high rate of debt.

In addition, people can't be sure how their circumstances are going to change. Redundancies are often in the news and thousands of people each year have accidents or suffer illnesses which leave them unable to work. In these circumstances, getting some form of insurance for borrowers' financial outgoings seems to make sense.

Payment protection insurance (PPI) is intended to do just that. It is a form of insurance often sold with financial products which means that repayments of credit cards and loans will take place even if people lose their income through redundancy, accident or illness.

Who Qualifies For PPI?

Most people who are aged 18 to 65 and who work more than 16 hours a week qualify for the policies. With most PPI policies there is a period of up to 120 days after signing up when borrowers are excluded from making claims. Prior illnesses or medical conditions are not covered by these policies, and neither are drug and alcohol abuse. Once borrowers have a valid claim, repayments are protected for anything from 12 to 24 months, depending on the terms of the particular PPI policy.

With a PPI policy it is essential for borrowers to pay attention to the fine print. Some lenders add the cost of the policy to the money being borrowed or credit being extended. This means that borrowers could take more credit than they intend to, and pay interest on the insurance policy to boot.

PPI Under Investigation

PPI selling is under investigation by the Office of Fair Trading (OFT). It has previously been criticised by the Consumer Association (through Which?) and has been examined by the Financial Services Authority. These organisations are worried about the lack of diversity in the market. There are few standalone PPI sellers and it is difficult for them to get access to customers.

The investigation is also looking at the variations in the cost of PPI policies, the huge profits made by financial organisations (since relatively few PPI claims are made) and the way PPI policies are sold to consumers. The OFT is concerned about whether sellers really give consumers all the information they need to make an informed decision about whether they need a PPI policy.

The Income Protection Alternative

Although it makes sense to have some form of protection for financial repayments, PPI is not the only option. There are also income protection policies, which protect a large proportion of people's income rather than an individual financial product. Income protection policies also tend to pay out for a far longer period than PPI policies. This makes an income protection policy worth considering as an alternative to PPI. This could result in savings and greater flexibility.

More Information on loan penalties from UK Personal Loan Store

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