Payment Protection Racket - Education is the Key
May 2005
Payment Protection Insurance (PPI) is a classic case of finance companies a) disgracefully profiteering from their customers and b) relying on a lack of financial education by their customers.
This is not to belittle anyone reading this who has taken out PPI in the past. Rather it's to highlight that if you want to best deals in the personal finance world alongside the most competitive prices, you've got to do some homework.
On the face of it PPI is not a bad idea. If you take out a loan with PPI attached then if you're made redundant or fall ill and therefore are unable to work, the loan repayments are insured. But never discount the greed at work in corporate Britain. PPI is therefore an incredibly expensive form of insurance and for that reason it's just worth it for most people.
Couple that with the fact that like any insurance cover there are so many ifs and buts in the small print. Many people who've taken out PPI have found out that they weren't covered because of the nature of their job, self-employed, contract workers, students or people with known medical conditions etc.
They're Forcing PPI On Us
Competition in the lending sector is hot at the moment so it's conceivable that some loans don't make that much money for the lenders but then if x% take out PPI the loans can actually be lent as a loss leader while the rich profits are generated from the PPI policies sold.
This makes even more sense as there is strong evidence that some finance companies and high street banks are only offering loans on the assumption that the borrower also takes out PPI. This can easily turn a good deal into a very bad one. Some might refer to this behaviour as financial blackmail and no doubt it impacts the less well off far more than the rich or educated borrowers.
How Profitable is PPI?
Over the last 5 years PPI sold with mortgages, credit cards and general loans has generated sales in excess of £6billion! Around 20 million policies are in force and the biggest pushers are banks and building societies.
Look at these simple figures to see how profitable PPI policies can be;
- A £7,500 unsecured loan over 5 years offered by Marks & Spencers costs £147.98 a month without PPI
- With PPI the monthly repayment jumps to £179.53, a 21% increase!!
- So PPI insurance adds a total of £1,893 to the total repayment of the loan, or just over 25% of the original principal
How Can Finance Companies Justify Their Costs?
The simple answer is because they can. They know full well that a large percentage of their clients are going to fall for the sales pitch (no doubt all sorts of scare tactics are used). The customers themselves are not stupid, nobody really is when it comes to money. It's likely though that on the whole they lack financial education. And it's generally a fact of life if you don't really understand about the product you're buying you're going to overpay.
How To Fight Back
The first thing to do is understand what PPI is, and the massive expense it involves. But PPI is a necessarily a bad idea? For many people it gives peace of mind and that can be important. The problem is that it cost so much.
So if you do want some sort of protection on your loan or loans then it's normally far cheaper to go for a separate income protection policy. For example a 35 year old man in normal health might only be quoted around £30 a month to guarantee an income of £1,000 a month. `
Finally when it comes to taking out a loan make sure that the rate you're being quoted excludes PPI because many lenders sneakily add it in.
STOP PRESS!
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