When you apply for any kind of loan or credit, you will probably find yourself being pressured by the lender into agreeing to a loan insurance policy or PPI. This insurance often adds considerably to the cost of the loan. So you may find yourself wondering whether it is something you really need.
The first thing you have to remember is that the lender gets a good commission for selling you this loan insurance. So although they might tell you that it is “highly advisable” or “strongly recommended” that you take it, remember they know nothing whatever about your personal situation. So it is entirely up to you to decide whether you need this insurance or not.
So how do you decide whether you need a particular loan insurance policy? The best way is to insist on looking at the details of the policy and finding out exactly what it covers, and doesn’t cover. You could find that you’d be paying for cover that didn’t apply to you.
The majority of loan insurance policies offer cover for circumstances where you can no longer make the payments because your employment income stops – usually because of sickness, accident or redundancy. So you may not need the cover if:
• you are in secure employment, or a job with a no-redundancy agreement;
• your employer has good sick pay arrangements in place;
• you are self-employed;
• you are retired.
In the latter two cases, of being self-employed or retired, you should not be sold this loan insurance at all, but regrettably most lenders will still try to get away with it. The onus is on you to be on the look-out.
You may also not need the cover if you have personal resources from which you could cover the payments if necessary, such as savings. Or it may be that an immediate family member, such as your spouse or a parent, could take the payments on until your were in a position to take them over again.
The secret is:
• Be clear exactly what you need.
• Read the small print (however small it might be!).
• Remember loan insurance is NOT compulsory.
• Be firm and don’t be bullied.
And if you’re confused, get advice from a good independent adviser or broker.
