The BBC have an interesting article on proposed changes to the sale of loan insurance policies.

Read more here.

Britain is a nation that enjoys a bit of credit.

Each day of year millions of pounds of debt is issued in one form or another, personal loans, hire purchase, lease purchase, contract hire, first year payment free and four years 0%; names immaterial, its all credit. Unfortunately, an intrinsic part of a credit sale, is the much more profitable insurance sale; and that can cost you a packet. 

Take the purchase of the shiny new car for example. Imagine, you are at the dealers, done the test drive, sorted out the spec, the colour, and the part exchange price on your old car.

An hour and a half at the dealers, you got the car that you wanted, feeling good, having triumphed over mans No 2(close second to a double glazing salesman) mortal enemy, getting the deal that you wanted.
At this point, you drop your guard, after all the deal is done; isn’t it?

The car salesman takes you through to a man called “the business manager”, who is actually the Finance and Insurance salesman; to talk to you about funding options.

He will talk about the various options, Personal Contract, HP, leasing, balloon payments etc, and the focus is on the affordability of the monthly cost. But you know approximately what the market is doing, because interest rates are constantly in the public domain and he knows this, so will offer something competitive, Say 5%. You think, great, I have done it again, guard dropped.

However, his job is to make some money out of you, so its time to play the joker!

Loan Protection Insurance

This insurance is designed to meet repayments if you are unable to, due to accident, sickness or redundancy. In this case it could avoid the car being repossessed and the ensuing bad credit rating, increase in the costs of all credit, inc mortgages that could follow.

For most of us, not being able to meet ones credit commitments is a real worry, he knows that and has a solution, a Loan Protection Policy.

The sales goes like this “for an extra 1.12 per day, that not even the cost of a sandwich, you loan can be protected against the consequences of not being able to pay due to accident, sickness or redundancy”.
Most people say, “oh alright”. He rings the bell, he got you.

The majority of Loan Protection Policies are sold in this way, to protect car loans, personal loans, second charge loans, loans for home improvements, conservatories; the list goes on. There are huge profits for the companies selling Loan Protection in this way as the cost is almost double that of a good quality stand alone Loan Protection Policy.

If you are going to take out a loan and want a Loan Protection Policy buy a good quality policy from an independent supplier.

When you apply for a store card, personal loan or new credit card, you will almost certainly have had this experience.  Your attention is drawn to a little box on the form labelled “insurance” – often with the words “strongly recommended” beside it.

What is loan insurance?  The idea is to cover you if you find yourself unable to meet the repayments – usually because of losing your employment, temporarily or permanently. The policy should make the repayments for a specified period – usually 12 months.  Loan insurance is often called PPI (payment protection insurance) though strictly speaking they are different.  Loan insurance comes from the provider of a specific loan and covers only that loan, whereas PPI can be obtained separately and covers any loan.

How much does loan insurance cost?  That partly depends what is covered.  There are various things you can cover for:

• accident;
• sickness;
• redundancy;
• critical/terminal illness;
• death.

A good loan insurance policy will give you the choice of how many of these you wish to be covered for.  The more of them you are covered for, the higher the premium will be.  There is often a 30 or 60 day wait from when the problem starts till when the policy starts paying out, but you should be able to opt for a “backdate” to Day 1.

The cost of premiums is usually quoted as so much per £100 of the amount of the loan.  Depending on how much cover you have, most loan insurance policies cost about £10-£30 per £100 of the loan.  As you can see, for a large loan this will be pretty expensive. 

Can you cancel a loan insurance policy?  Many people ask this question if they feel they have been pushed into taking out loan insurance they don’t really need.  The answer is: in theory it should be possible to cancel a policy linked to a specific loan, and still keep the loan.  In practice, however, the lenders can make it difficult for you as it isn’t in their interests for you to cancel.  For example, they may say that you have to cancel the whole loan and take out a new one – and they will probably give you less favourable terms on the second one!

The important thing is, be on your guard when taking out any new loan or credit agreement.  Decide in advance what you need, and don’t let yourself be pressured into signing up for anything you don’t really want.

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.

Is loan insurance worth the money?

You will certainly be offered loan insurance from your loan or finance company when you apply. These companies receive large commission payments for each policy sold so they will push hard and encourage you to buy. Unfortunately, the quality of this cover is not always very good and frequently is overpriced.

So if you want loan insurance where should you buy from?

There are specialist insurance providers who offer loan insurance policies. These plans will be independent from your loan arrangements making them very flexible as the cover can be changed or even stopped. An independent provider of loan insurance will need to make sure their policy is competitive and keenly priced. They are afterall in competition with other companies offering the same product.

A search on Google for “loan insurance” or “loan payment insurance” should bring up numerous companies that you can choose from.

What does loan insurance offer?

The main aim of loan insurance is to cover your regular loan repayments in the event of accident, sickness or unemployment. In the event of a claim your payments will be covered for up to 12 months. Loan insurance policies are renewed automatically each year so you always have cover in place.