PPI: how the banks make a profit

When you apply for a loan you will often get offered Payment Protection Insurance (PPI) along side their loan, credit card or mortgage as a safety measure so that if you fall ill or lose your job then you are not going to incur any further charges and will help you make payments in tougher times.

PPI has recently come under scrutiny with financial experts and regulators such as the Office of Fair Trading and the Financial Services Authority both have investigations into aggressive selling techniques of PPI to lenders. If the banks are found guilty of over-selling then thousands of lenders will be paying less on their repayments but also claim back the money that they paid towards PPIs as their policy was mis-sold.

This is all well and good for people who feel they’ve been paying more than is necessary on their loan or credit cards but it has been revealed recently that PPIs are the only thing keeping lending from being a loss-generating business. In 2006 banks were worrying as the personal loans business was looking like a loss generating industry. PPIs have brought the numbers up and now are making a slight profit. This is perplexing as in 2005 the personal loans business was thriving and this was before PPIs were introduced.

So how much can a lender expect to make on personal loans? It is estimated that lenders can generate £1,200 on top of the policy thanks to PPI, considering each case would cost £20 to setup it is easy to see why this add on has been pushed on borrowers so much. The totals generated by PPIs each year are between £2.2 billion and £2.6 billion.

So is PPI necessarily a bad thing? Despite the controversy over the mis-selling of PPIs it is still a valuable addition for those with mortgages or secured loans as if they do take ill or lose their jobs then the burden of your home being at risk is eased by knowing that you are well prepared with your Payment Protection Insurance until you are back on your feet and earning.

As with any concerns you may have about your loans, Credit Cards and other debts make sure that you seek independent financial advice as they will be able to let you know whether you have been mis-sold Insurance or any other ways that you can make your money work for you.