Protection comes at a cost

Payment Protection Insurance comes in for a lot of criticism and is often accused of being expensive and unnecessary. Many consumers don’t understand how this insurance protects them or where it fits in to the cost of the financial product they are using.

Payment Protection Insurance or PPI as it is generally referred to can have its uses however. MoneyExpert.com looks at the pros and cons of this controversial product.

If the worst should happen

If you have a mortgage, credit card, loan or any form of debt then the chances are you will have, or have been offered, some form of PPI. The product is designed to protect you in those circumstances where you may no longer be able to keep up with the debt repayment. If you were to be involved in an accident, fall ill or be made redundant for example then the insurance will kick in and cover the repayment on your behalf.

The PPI payment cover is unlikely to continue forever. The policy will continue to make repayments on your behalf for a specified period, eg. one month, six months, two years. The length of time you are covered is likely to be connected to the cost of the premiums you’re paying.

In most cases PPI is an optional extra, but in some instances it will be added automatically to your product unless you ‘opt out’. If you’re not sure whether you’ll be paying for PPI then check the policy details.

Adding to the load?

PPI charges vary dramatically between the different products and providers.

Credit cards: of the 224 cards available on the market only four do not offer PPI. In most cases the PPI charge is a set number of pence per £100 pounds you spend. The lowest rate available on the market comes from the Post Office credit card, which charges 45 pence for every £100 you spend. If you had a balance of £2500, you would have paid £11.25 in PPI.

This rate can go as high as 150 pence per £100 however with providers such as the Debenhams credit card meaning that on a balance of £2500 you would be paying over £30. The market average however is 79 pence.

Personal loans: these tend to be less standardised in the formula they use for calculating PPI and have come in for criticism as a result. Even a loan with a great APR can be made significantly more expensive if the PPI is excessive. To borrow £10,000 with Tesco over four years for example will cost you £11,362 at 6.6% APR without PPI, meaning your monthly repayment would be £236. Adding PPI however increases the overall repayment to £13,421 and the monthly repayment to £279.

Mortgages: as with loans, each provider sets their own rates, which can vary dramatically. If you were to insure your monthly mortgage repayment of £900 through an independent insurer the cost comes to £18.45 a month if you were to use the insurer i:protect. This policy would cover you for twelve months.

Considering the cost…

Twenty million PPI polices exist in the UK at present and for some people they will have provided a helping hand when they needed it most. The PPI costs associated with a small credit card balance tend not be extortionate, but once when you start insuring a large loan or your mortgage then PPI can add significantly to the overall cost.

It’s important to think about whether you need PPI and to calculate how it will impact on the overall costs of your repayments. If you are informed about how PPI works then it’s difficult to be missold the product.

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