unsecured personal loan

Although Payment Protection Insurance (PPI) – intended to protect repayments when borrowers are hit by accident sickness and unemployment – is also sold with store and credit cards and mortgages, the provisional 218-page provisional report from the Competition Commission (CC) focuses on its impact on personal loans.

Many households facing sharply rising costs will arrange £10,000 personal loans over five years in the next few months – and pay over the odds for PPI because they aren’t paying attention.PPI could lift their monthly repayments from £200 to £250 if they accept a policy from the lender, instead of buying cheaper cover through an independent broker. Many PPI policyholders don’t even realise they have bought it.

The CC report accuses High Street banks of making £39 excess profit on every £100 of business in the personal loans sector, and warns that consumers may be overcharged at least £100 each when they take PPI in their loan package.Consumer group Which? has campaigned against PPI for a decade and estimates as many as 2m PPI policies were mis-sold with personal loans in the last five years, often because buyers would have been unable to claim due to pre-existing health conditions or details in the small print. Stress and back pains, for instance, are not covered in all PPI policies.

Many buying PPI with a 10-year loan might be unaware that PPI policies may only be effective for five years. In addition, they might not realise that the single premium for the policy, added to the loan, is incurring interest charges for years into the repayment period.PPI is certainly a money spinner for big lenders – only 14% of PPI premium income goes back to policyholders making successful claims, as opposed to 54% for home insurance and 78% for motor insurance.

The Competition Commission claims the 12 largest PPI providers enjoy a return on their equity of 490%.It says borrowers are in a captive market – worth £5.5bn a year – dominated in 2006 by Lloyds TSB, Barclays, HBOS, Royal Bank of Scotland and HSBC.The banks, for their part, claim loan rates would rise if their PPI income was slashed.