What is Payment Protection Insurance?

Payment Protection Insurance (PPI) is often sold alongside credit agreements and though it is meant to protect a borrower against the risk of being unable to make repayments in the event of unexpected circumstances such as an accident, sickness or unemployment, it frequently fails to do so.

If you've taken out a mortgage, a loan for a kitchen or a car, applied for a credit card or consolidated your debts, payment protection insurance will almost certainly have come into the equation. Of course, PPI can be a lifesaver for some people but government figures suggest they represent a tiny minority. Statistics reveal only 4% of people ever claim on their PPI policies and that one in four of these claimants is refused. Small print exclusions and administrative nightmares are usually to blame.

When you take out a loan, credit or store card, you're often expected to take out Payment Protection Insurance (PPI) at the same time. The policy is meant to cover the loan or card repayments if you become unable to afford them yourself due a change oin your personal circumstances, such as illness, unemployment or because you have an accident.

Selling PPI is big business, with an estimated 20 million policies already in force and annual gross premiums in excess of £5 billion.

Although it's supposed to give borrowers peace of mind, trying to draw on your PPI policy is more likely to give you sleepless nights. Many policyholders find that they cannot make a successful claim on their policy because of exclusion clauses and administrative barriers.

What's more, premiums for PPI policies can add anything from 13% to 56% (CAB research) or more to the total amount to be repaid on a loan agreement.

More worryingly, you might have Payment Protection Insurance and not even know about it. Some lenders automatically include payment protection insurance in the quotes they give for monthly loan repayments.

How much is PPI costing you?

(Source Citizens Advice Bureau evidence report findings Sep '05)