Martin Lewis is back with Money Matters and this time he's telling us all about Payment Protection Insurance (PPI).

It's thought by some to be the biggest money scandal of the decade - Payment Protection Insurance (PPI) is an insurance sold alongside loans which covers repayments in event of sickness or unemployment.

However, many loan companies and banks have been misselling the insurance and as a result customers have been over paying...

WHAT IS PPI?

If you've taken out a loan, it's likely you would have been offered payment protection insurance (PPI) with it. This is a form of insurance designed to cover your repayments for a year in the event of an accident, sickness or unemployment.

Payment protection insurance (PPI) itself isn't a bad product, it is particularly useful in the current financial climate, though if you've enough savings to cover your repayments, you could use those instead. However PPI has been widely mis-sold with thousands of loans - even those for whom PPI is necessary are probably paying four times more than they need to, if they got it through their lender. Generally, the amount you pay for loan PPI is about 15% of your balance but it could be up to 30%. It doesn't sound much, but it quickly mounts. On a £5,000 loan you'd pay £750 for insurance.

WHY MIS-SOLD?

There are some 20 million PPI policies in the UK, generating about £5 billion a year for the companies involved. The insurance cost almost always dwarves the interest, so it's hardly surprising many believe this is the most overpriced financial product around.

Sales staff were hugely incentivised to push these products whenever possible, and many were under so much pressure they strayed far from the truth. Worse still, in June 08, after a 15 month investigation into PPI, the Competition Commission found the following average payouts: Car Insurance: 78%, Home Insurance: 54%, Mortgage PPI: 28%, Personal Loan PPI: 15%, Credit Card PPI: 11%. Most of this profit goes to the lenders, not the insurance companies. The only silver lining to all this? It means mis-selling cases are easier to win.

HOW IT WORKS

You want a £5,000 loan over five years. You've seen it advertised at a cheap 7% rate, so you call up...
You: "I'd like a £5,000 loan over 5 years please."
Bank: "I presume you've seen our competitive interest rates."
You: "Yes, can you give me a quote please."
Bank: "Sure, our fully protected loan is £125 a month."

Most people would find it virtually impossible to mentally calculate how much the monthly repayments should be, so £125 sounds fine. However the bank's answer contained two little words - "fully protected". This means you're also being sold expensive insurance. Actually the cost of the loan at 7% should be £100 a month, the remaining £25 is to pay for the insurance. That means if you'd just got the loan you'd have repaid the £5,000 borrowed plus £950 in interest. Yet the insurance adds £1,500 over the life of the loan; that's MORE than the interest cost and it's almost pure profit for the bank!

STEP-BY-STEP GUIDE TO RECLAIM LOAN INSURANCE

  • Check your policy. Go through your agreements in detail, and look for any mention of an insurance payment - it may be worded as 'payment cover', a 'protection plan', 'ASU', 'loan protection', 'loan care' or similar. If you're unsure, contact the lender and ask. If you find you've been paying for PPI you didn't know about, it's worth investigating. But note that if you weren't actually misinformed about, or mis-sold PPI you're unlikely to have a case, and there's little point in starting a claim without good grounds. If your insurance is older then 6 years but still active or if it ended in the last 6 years your success on reclaiming may be reduced. This is the same for if your insurance ended more then 6 years ago and if you don't have the paperwork, it's unlikely there will be records and, sadly, unlikely the reclaim will be successful. Anyone who has claimed on a PPI policy can still submit a mis-selling complaint,  though the chances of success are unclear.
  • Go through the checklist
  • Write to your lender
  • Write to the Ombudsman

More information