What is Payment Protection Insurance

Payment Protection Insurance (PPI) is designed to provide insurance protection in the event of the insured person being unable to work as a result of accident, illness or redundancy.

PPI is typically sold alongside some form of money borrowing, like a secured loan, unsecured loan, mortgage, car purchase, credit or store card. Quite often the loan provider will make it sound like the PPI is compulsory, but normally it is optional and you do not have to have it.

Policies will usually pay out after a "waiting" period of typically between 1 and 3 months if the insured is unable to work.

Why is PPI Controversial?

Banks and other lenders earn very small profits on loans and credit cards. In order to boost their profit they rely on selling products which deliver high levels of profit. PPI insurance is extremely profitable for the lenders and they are very keen to sell every borrower a PPI policy.

Some lenders are very agressive with their staff and brokers and require them to sell PPI to at least 70% of the people who borrow money - regardless of the borrowers circumstances or requirements.

PPI polices are often full of exclusions - normally hidden in the small print, which are designed to restrict the number of polices that they have to pay out on.

A majority of borrowings are covered by a single premium PPI, this means that the total cost of the PPI is charged as a single premium upfront and the all the premiums are added to your loan and you pay interest on the PPI as well as the loan. You can take out a PPI policy where premiums are paid monthly and this saves a lot of unneccessary and unreasonable interest costs. Of course, this is not in the lenders interest as they earn less money from you. If you were sold a single premium policy and were not offered a monthly premium policy you may have been mis-sold. 

The Worst High Street Lenders

According to research, Natwest, Abbey, the Alliance & Leicester and Northern Rock top the PPI rip-off table. Based on a 5 year unsecured loan:

Lender                         Loan Size            PPI Cost               Loan With PPI                  Percentage PPI

NatWest                      £10,000                 £3,267                   £13,267                                 32.67%

Abbey                           £10,000                 £2,766                   £12,766                                 27.66%

A&L                               £10,000                 £2,376                   £12,376                                 23.76%

Northern Rock            £10,000                 £2,233                   £12,233                                 22.33%