Giving away over 6 billion pounds in PPI

15.07.2005 Even though many banks and building societies claim that they make it clear to customers what PPI is and what it costs, it is very common that they add it to the cost of the loan without warning borrowers they are not obliged to take it. According to the British Bankers’ Association, the rules that apply to the sale of PPI have recently been tightened; two separate signatures are now required from borrowers in all consumer credit agreements that relate to PPI.

Consumers often underestimate how much a payment protection insurance PPI policy costs. Recent research by chief specialists has shown that consumers who take out PPI with their mortgages and personal loans have discarded over ₤6 billion a year. According to Life Search insurance brokers, banks make profit out of 80 per cent of the premiums paid PPI owners (25 million). Which means that less than ₤500 million are used to pay claims. The money earned by banks from PPI is around 15 per cent of their pre-tax profits.
 
In an analysis on how a typical loan’s cost changes with and without PPI, Morgan Stanley investment bank found that the repayments of a ₤10,000 loan from EGG repaid over two years at 7.9 per cent APR, would be ₤450 without insurance. If the PPI is included, monthly costs rise by ₤65, which inflates the effective rate of interest from 7.9 per cent to 23.6 per cent.