Banks are making profits in excess of 900% from the sale of payment protection insurance (PPI), pocketing £1,200 from a policy that costs them just £20.
The startling figures were released in a report by the Competition Commission, which is investigating claims that PPI is excessively expensive, yet rarely pays out when policyholders try to claim.
PPI is designed to cover payments on a debt – usually mortgages, credit cards or personal loans – should you fall ill, have an accident or become unemployed.
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Always choose a standalone policy
Because of the high profit margins on offer, many lenders have been trying to sell these policies too aggressively, or mis-selling them to people who they knew would have no chance of claiming.
The problem is worsened by the fact that automatically tacking on a lender's PPI is notoriously expensive – cover for a £10,000, four year loan at Britannia Building Society costs an additional £2,627.
If you do want to purchase PPI, make sure it’s from a standalone provider, as this works out up to seven times cheaper. As an illustration, a policy for the above loan at British Insurance will cost you £379 in total.
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Mis-selling still common
PPI has been on the radar of the various financial watchdogs for some time now, yet mis-selling remains rife.
Just last month the Financial Services Authority fined HFC Bank over £1 million – its largest ever PPI-related fine – and suggested all customers of the bank check their policies to see if they were mis-sold the controversial insurance.
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Crackdown could mean pricier loans
The Commission’s investigation is likely to continue until the summer, but it is feared that any crackdown on the insurance – such as banning certain lenders from selling it entirely – could lead to an increase in loan prices.
This is because many lenders appear to be using the massive profits to subsidise the rate at which they lend money to customers.
“The personal loans business has suffered from declining profits in recent years to the point where in 2006 it appears to have been loss making before taking into account income from PPI,” the report stated.
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Want an interest free loan?
That means customers needing to lend money would do well to act sooner rather than later, as rates could rise by as much a 2-3% in the summer.
In fact, with loan prices already above average due to the credit crunch, you could save yourself a bundle by putting that debt on an interest free credit card, and switching as necessary to secure yourself an interest free loan.
Read more about it here.
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