Payment Protection Insurance

A number of years ago, it became apparent that many borrowers were falling behind on payments for loans, credit cards and mortgages when they were unable to earn money due to illness or unemployment. To try to avoid them getting into debt in this way, payment protection insurance was introduced.

What is Payment Protection Insurance?

Payment protection insurance – also known as PPI and credit insurance – is insurance designed to protect borrowers when they are unable to make payments on consumer credit products due to circumstances beyond their control, such as illness or redundancy. The products on which PPI is available can include personal loans, car loans, credit cards, mortgages and catalogue payments; indeed most consumer credit products can be covered by some form of this insurance. Mortgage payment protection insurance, loan payment protection and credit card payment protection insurance are now very familiar financial products, and are usually offered each time someone takes out one of the corresponding forms of credit.

How Does Payment Protection Insurance Work?

The borrower pays an extra charge on top of any loan charges, credit card charges, mortgage fees or interest payments; this pays for the insurance, which is activated if the borrower is unable to make repayments due. Once the insurance is activated, repayments on the credit product insured are paid by the insurer, either until the borrower is back to work and able to make repayments, or until a limit stated in the terms and conditions of the insurance is reached, whichever is sooner. This limit is typically either six months, one year or two years; it is essential that any borrower with PPI checks the exact period to ensure they can plan their finances as after the insurer’s payments have ended they will be expected to take responsibility for repayments once more.

Anyone taking out payment protection insurance should beware, however, as due to the terms and conditions attached it is not appropriate for everyone. Those who are on fixed-term employment contracts and those who are self-employed may not be eligible, as PPI is mostly aimed at those in full, permanent employment. If a person in any of these ineligible groups takes out the type of PPI offered as standard with most credit products, it is likely that they are wasting money as they will probably not receive payouts if they are unable to work. It is recommended that anyone that is self-employed or on a fixed-term contract that wishes to take out PPI contact an insurance broker who can then find insurance appropriate for them.

Problems with Payment Protection Insurance

It has become apparent in recent years that there have been problems with how PPI was sold to consumers. In short, payment protection insurance was mis-sold to a large amount of borrowers: it was sold to those that could not claim due to being self-employed or on fixed-term employment contracts, it was sold on products for which PPI was inappropriate, and it was sold to borrowers that could not afford the premiums. Further, PPI was often sold without the consumer being given full information on its drawbacks.

Payment Protection Insurance Claims

To this end, many consumers started legal action to get compensation for the PPI they had been mis-sold. So many borrowers commenced legal action that eventually a formal mechanism was set up by lenders to allow the processing of payment protection insurance claims without recourse to the courts.

Anyone believing they have been mis-sold payment protection insurance should approach their lender in the first instance, as each lender should have procedures in place to handle claims. If the lender does not have such procedures, then the borrower should contact the Financial Ombudsman, or contact one of the many charities or government-backed bodies that offer free debt advice. They can advise the consumer just as well as any of the companies that offer services handling PPI claims, with the added benefit of not charging for their service.