Payment Insurance Ban on Loans Sold by Lenders

The cost of personal loans could increase say lenders after the competition watchdog called for a ban on the sale of payment protection insurance at the same time as loans are organized. The Commission's proposals follow an investigation lasting sixteen months into the market in payment protection insurance which is worth 5 billion pounds each…

The cost of personal loans could increase say lenders after the competition watchdog called for a ban on the sale of payment protection insurance at the same time as loans are organized.

The Commission's proposals follow an investigation lasting sixteen months into the market in payment protection insurance which is worth 5 billion pounds each year. The insurance which has been sold alongside loans, credit cards and other credit arrangements, pays out if the policyholder is unable to work as a result of illness, or accident or if they are made redundant.

The watchdog says that competition in the market is restricted as most of the thirteen million policies in existence were sold at the same time as the policyholders took out some form of credit. Many of these policyholders did not realize that they could shop around for this cover and the lenders often claiming that taking the insurance from the lender increased their chance of getting the loan. Some clients even said that they did not know that they had bought payment protection insurance.

The commission, said that it was considering making all lenders wait fourteen days before they could recontact their client in order to offer the insurance. This is to allow the client to shop around. Their proposals are also expected to ensure that lenders give consumers two quotes, clearly setting out the cost of the policy, both the cost of the policy on its own and then the total cost when added to the loan repayments.

They are also expected to be a ban on single premium payment protection insurance. This form of the insurance is often the most expensive way of buying the cover as the cost of the cover over the entire period of the loan is added to the loan in one lump sum when the loan is taken out. This means that the loan is much bigger and this in turn contributions higher interest payments.

Many commentators have welcomed these proposals, despite warnings from the lenders that the changes could result in higher costs. Not only do the lenders stand to reduce their profits if payment protection insurance sales fall, but the Commission found evidence that the insurance premiums were subsidizing loans and keeping interest rates low.

Industry sources have already reported that lenders had already increased margins on personal loans as a result of the credit crunch and the loss of insurance sales could worsen the situation. The consumer group Which? That said they would be very disappointed if just because the gravy train is being brought to an end, borrowers are penalized. But they added, “lenders have a history of sneaky behavior”.

The problem has been the lack of transparency in the sale of payment protection insurance and that would at least come to an end if lenders were prohibited from cross subsidizing products.

The attorneys proposed the Commissions' proposals could leave people exposed to financial danger should they fall ill or be made redundant. The Association of British Insurers said that in the last twelve months there had been a 69 per cent increase in the number of payment protection customers claiming on a policy after losing their job.

This might be true if many people used the new regulations to avoid taking out the insurance. Let's hope that the industry finds new ways of marketing which are no less successful that before, but which are much fairer.