Loan insurance changes could raise cost of loans
The latest sour grapes comment from lenders, is that the price of personal loans may have to increase, following the competition Commissions recommendations that Loan Insurance should be banned when sold alongside a credit agreement.
The lenders would do well to avoid making such outrageous statements, which fly in the face of the governments wishes to keep the cost of credit down.
The Loan Insurance market, which falls within a type of insurance known as PPI market is worth around £5bn a year in premium income.
The Competition Commissions final report is due out in January 2009, and it looks like they are sticking to their guns and insisting that firms; that’s credit providers and intermediaries, wait for 14 days before contacting a customer to see if they want to buy loan insurance, which covers debt repayments if the holder is made involuntarily redundant or cannot work due to accident or sickness.
Yes, of course firms selling loan insurance are not happy with the situation, however threatening to pass the loss of this income stream on to customers through more expensive loans, is just sour grapes. Lenders have simply had it too easy, for two long and have been selling polices which are half as good as those that can be found stand alone; at almost double the price.
The Commission’s ruling has to be a good thing for the consumer and the timing could not be better based on the economic outlook for 2009.
Loan Insurance
Personal debt in the UK is constantly on the rise with more and more people falling behind on their loan repayments. This leaves them with an accumulating monthly debt, failing to repay instalments on a loan can also affect a person’s credit rating which will affect their future chances of obtaining mortgages and other types of credit. In addition to these financial problems, failing to repay a loan for whatever reason can cause personal problems, distress and even lead to depression. Failing to repay a loan because of bad financial management is one thing, but it is highly stressful if a person is unable to repay their monthly instalments because of illness, injury or being made redundant as most of the time the person has no way of protecting against these unfortunate incidents from occurring.
There is a way a person can protect themselves financially if they lose income due to one of the above reasons, taking out personal loan insurance can help with the monthly repayment costs of a personal loan or mortgage. Loan insurance policies are available from most high street lenders and specialist online companies, you can even ask for loan insurance from the same company as you have had the loan from. Due to the competitiveness of the loan insurance market, it is important to shop around and find the best deal which will suit your needs exactly. Loan insurance can be expensive in some cases so just because you received a low interest rate on your loan, don’t expect to get cheap loan insurance from the same lender.
You will find that loan companies offer the most expensive loan insurance as they do not need to compete for your business. A better option would be to buy personal loan insurance from an independent specialist provider.
Loan insurance will protect a person from the cost of their loan repayments only. To work out how much loan insurance you require it is important to add up all of your monthly repayment costs from existing loans and quote that figure to the lender, you will then be protected against that figure if you are unable to earn a living.
If a person is unable to work, it is very unlikely that income support or job seekers allowance will add up to what they used to earn whilst working, making living, let alone loan repayments very difficult. Nobody knows what lies around the corner and no one is invincible, but at least with loan insurance people have the piece of mind that they will not get into impossible debts due to circumstances which could not have been helped.
What is personal loan insurance?
Personal loan insurance is a form of accident, sickness and unemployment insurance.
Accident, sickness and unemployment (ASU) policies generally come in three different types:
The variations determine what the main aim of the policy is. With personal loan insurance, the main objective is to protect the loan repayments in the event of accident, sickness or redundancy. Should one of these events stop you from working then the loan insurance policy will payout the sum insured for up to 12 months. This should provide enough time for you to get back on your feet. At the end of the 12 months, or earlier if you return to work, the payments will stop.
Put simply, if your loan repayment is £250 per month, then this is the amount you need personal loan insurance for. The premiums for loan insurance are extremely competitive and much, much lower than policies provided by the loan companies themselves.
Providers of personal loans rely on the sales of loan insurance to produce a valuable stream of income. They do not have to provide a competitive policy and so the premiums are much higher than a personal loan insurance policy which is available from an independent source.
Getting the best loan insurance
How do you get the best loan insurance?
Generally speaking, the worst place to buy loan insurance from is the personal loan company. Whilst they might encourage you to take up their loan insurance cover it is likely to be very poor value for money.
Loan insurance policies provided by lenders are loaded with high amounts of commission, this can be 40-60% of the premiums that you pay! Unsurprisingly, the company will want you to buy their loan insurance, and the reason is very simple to see.
A much better option is to buy an independent personal loan insurance policy.
Independent providers of personal loan insurance need to provide loan insurance policies that:
- have competitive premiums
- have good quality cover
- are easy to understand
- are easy to apply for
This competition drives up the quality of the cover and drives down the premiums. These types of policy are great value for money and so much cheaper than loan insurance from your bank or finance company.
One added advantage of buying an independent personal loan insurance is that you are in control. You can decide to change the policy if you need to, or stop it when your loan is paid off.
