A study by the Competition Commission has confirmed what we all knew already – that payment protection insurance (PPI) is fabulously lucrative for the banks and that without this income stream, theire personal loan business would be largely unprofitable.
According the Commission’s report published yesterday, the banks are raking in £2.2bn and £2.6bn a year from PPI, but in 2006, even with PPI sales included, their personal loan business was only marginally profit making.
This was due to the large number of new entrants to the market – a trend which served to drive down the APRs charged on personal loans, thereby increasing banks’ dependence on PPI to make a profit.
Typical commission rates were 50-80 per cent for PPI sold alongside personal loans and credit cards, and 40-65 per cent when tied in with mortgages, with the banks typically taking 90 per cent of these commissions.
While everyone wants to see banks offering competitively priced personal loans, if this is being paid for by a hidden cross subsidy, in the form of PPI, this is unhealthy and unfair on the customers who are paying for it.
Given that a large percentage of PPI customers have little understanding of the product, and a large percentage of policies have been mis-sold to individuals who will never be able to make a claim (because they are unemployed, self employed or contract workers), this is all the more inequitable.
While PPI can be useful for some people, most customers would be better off buying a policy from a stand alone insurer like the Post Office, which charges just £4.50 per £100 of cover, compared to the typical £8.50-£9 per £100 of cover charged by most of the high street providers.
Regrettably, too many banks continue to sell PPI tied in with loans, credit cards and mortgages, by automatically including it in quotations. The sooner this pernicious practice is outlawed the better. For more on this scandal and how to claim compensation for a mis-sold policy.
visit: http://www.mortgageguideuk.co.uk/blog/mortgages/payment-protection-insurance-for-loans/
