Payment insurance poor value, confusing and doubles credit costs says OFT

Payment protection insurance supplied with loans offers poor value, is confusing, and often doubles the cost of borrowing, the Office of Fair Trading (OFT) has found.

Payment protection insurance is intended to insure that loan payments are covered in case the borrower falls ill or loses their job.

But the OFT found that due to the way it is often packaged with a mortgage, loan or credit card it is almost impossible to determine the real costs of a deal.

Some policies can cost up to four times as much as others offering similar levels of cover on similar products.

The OFT cited differences of between £16 and £40 on a £5,000 unsecured loan “with very little obvious difference in the cover provided”.

The policies were often not mentioned on the promotional material of the products they were sold with and effectively doubled the best rates of 37 out of 40 providers considered.

“When a customer can neither determine the total cost of the loan with payment protection insurance added nor the quality, the potential for customers who may already be financially vulnerable to get value for money is significantly reduced,” said the report.

Around 70 per cent of people who applied for homeowner loan deals opted to buy payment protection.

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