Payment Protection Insurance: The True Cost
If you're taking out a sizeable loan, the idea of payment protection may sound like a good idea. Programs such as these protect buyers in the event that they are unable to make payments on the loan due to events such as layoffs or medical emergencies.
All types of loans offer this type of protection, from unsecured credit cards to secured loans such as mortgages. But what's the real cost of this protection, and is it worth it? An estimated one billion pounds are spent on buyer protection insurance each year.
As the lending industry becomes more and more competitive, lenders are seeking ways to bring in more pounds to offset the lost revenue from lower interest rates. Offering various add-on sales is one way to do this, and buyer protection is one of those add-on services.
The fact is that buyer protection can cost the consumer almost as much as the cost of the interest, nearly doubling the cost of the loan. Therefore, consumers have to carefully weigh the costs against the protection and decide for themselves if the purchase is worth it.
In an unstable economy, such protection may be welcome and may afford the buyer peace of mind. This in itself can sometimes be worth the cost, but not always. Each program is different in what it covers and what the restrictions are, and buyers need to read the fine print to fully understand what types of situations are covered and in what circumstances.
It could be that the policy will not cover a layoff situation, or only covers unemployment after a certain period of time in which the applicant must demonstrate an active job search. In addition, as with other types of spending activities, it pays to shop around. The lender's program may be much more expensive than an independent policy, and the coverage may be better. Researching options could save consumers money.
Of course, there's always the option of not purchasing the buyer protection policy. If this sounds risky, consider that this type of protection is relatively new. It's a gamble, of course, in that you never know if you'll need it, much like insurance coverage.
It may be nice to know you have it, or you may decide it's not worth the cost. Before signing on for such a program, be sure to read the fine print. The new loan laws are useful in this regard, but it's still up to the consumer to be fully informed. Consumer protection agencies continue to receive complaints about information not being clear despite the government's new policies.
Chances are, if you apply for a loan, you will be pressured into purchasing this type of protection.
Bear in mind that the person selling the policy may not know much more about it than you do. Lenders are also required to disclose all restrictions on such policies as well as the purported benefits, but this does not always happen. The bottom line is that the consumer is ultimately responsible for his or her financial situation and remaining informed.