Banks are not by nature altruistic institutions. Think of them instead as the Gordon Browns of the private sector: endlessly giving with one hand only to take more with the other. This means that if you ever see them offering you something attractive, you can be absolutely certain that there will be a catch – the trick is just to figure out what it is before it starts costing you. Anyone in any doubt need only look at last week’s damning reports on the controversial £5.5bn payment protection insurance (PPI) market, says Rupert Jones in The Guardian. It turns out that the banks have been bumping up the margins in their personal loan businesses (where interest rates have been at historical lows) by charging massively over the odds to insure those loans.
What is Payment Protection Insurance?
PPI is a form of insurance, usually sold alongside a loan and designed to help borrowers keep up payments in the event of accident, sickness or unemployment. Seven million policies are taken out each year and each one is a magic money spinner for the banks: Paymentcare estimates that of the £4bn spent by borrowers on PPI every year, £2.5bn is stripped out immediately by the banks in commission payments, for example. The sales pitch on these policies is that if you are made redundant, get very ill, or have a serious accident, you’ll need it. But most people will find that they don’t need it. You should have a good six months worth of income in a savings account to provide for such an emergency anyway and most employers (85%) also offer more than statutory sick pay: many pay your salary for six months or so before reassessing things.
What are the drawbacks of PPI?
PPI also tends to come with a great many get-out clauses included to the benefit of the insurer: you won’t be able to get a payout if you have a part-time job rather than a full-time one, if you are self-employed, if you find you can’t work as a result of a health condition that was pre-existing, or if you are working on a short-term contract. So even if you think you might need some kind of income insurance, this isn’t it. Only 4% of people who take out PPI ever end up claiming on it and 25% of those claims end up being rejected.
PPI is also outrageously expensive, largely because it is sold alongside loans such as mortgages and the high-street providers have a huge distribution advantage, says Emma Thelwell in The Daily Telegraph. Thus in spite of not offering the best deals, they still sell 80% of all policies. Price comparison website uSwitch points out that PPI taken out with a £10,000 loan over a five-year period would cost you £4,735 with Norwich and Peterborough Building Society, but just £548 if you bought it from the Post Office. That represents a massive saving of £4,187 – not far off half the value of the loan you needed in the first place.