Andrew Hagger of Moneyfacts.co.uk

Andrew Hagger of Moneyfacts.co.uk looks at the pitfalls of purchasing payment protection cover from your loan provider.

"If anyone is thinking of taking out loan insurance with a high street lender, they should think twice before making such a decision - as there is an opportunity to save hundreds of pounds and there's no catch.

"The profit margin for banks on personal loans is small. There are a number lenders offering very competitive rates of between 5.5% and 6.0% APR, but when you consider base rate is currently at 4.5%, by the time you take bad debts into consideration there's not much left for them by way of a return.

"This is the reason that lenders encourage their staff to cross-sell payment protection insurance (PPI)as this can be extremely profitable to them. In some cases, bank staff are targeted to sell this cover and have the opportunity to earn a financial bonus. However, the downside so far as the consumer is concerned is that, in some cases, this can lead to a 'hard sell' approach and the insurance sale not being made for the right reason, i.e. the needs of the customer.

"When you look at the cost of cover provided by standalone brokers, such as paymentcare or Burgesses, it is clear to see why lenders are keen for their staff to sell this insurance to customers wherever possible."

The chart below gives some examples of how much money customers can save by not buying PPI from their lender.

Lender	Rate APR	Monthly Cost of PPI	Total Cost of PPI	Potential Saving
HSBC	13.9%	£28.34	£1020.24	N/A
NatWest	10.1%	£25.79	£928.44	£91.80
Lloyds TSB	8.9%	£21.12	£760.32	£259.92
Lombard Direct	6.4%	£21.18	£762.48	£257.76
Tesco Personal Finance	7.4%	£17.71	£637.56	£382.68
Northern Rock	5.7%	£13.78	£496.08	£524.16
Burgesses**	N/A	£11.70	£421.20	£599.04
Paymentcare*	N/A	£8.58	£308.88	£711.36

Examples for £5,000 over 36 months
*Cover includes life, terminal illness, unemployment, accident & sickness (covers monthly loan payment of £156)
**Cover includes life, accident, sickness, & terminal illness (covers monthly loan payment of £156)

Further reasons for taking PPI from a direct provider rather than your lender

• With the Banks/Building Societies the full insurance premium is added to your loan balance and interest charged on it at your borrowing rate for the full term.
• With direct cover you have the flexibility of paying the premium separately by direct debit from your current account with no interest charge and are free to cancel it when you wish without any form of financial penalty.
• If you repay your loan early you will not receive a pro-rata refund on your insurance premium as the premiums are front loaded; in fact if you repaid a five-year loan after four years, the refund you would receive would be negligible.
• There is no pressure to take out standalone PPI; the customer is in the perfect position to know their financial and job security position and can choose the type of cover that they feel best meets their circumstances.
• The cover doesn't have to be taken out at the start of the loan.