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EARLY repayment of personal loans protected by single premium payment protection insurance (PPI) means that borrowers are paying upfront for cover that they will never need, according to independent PPI provider

Current borrowing trends mean that a great many personal loans never run their full term but consumers are still being sold single premium policies which charges the insurance premiums upfront.

"Many people who take out personal loans re-finance or consolidate their borrowings," said managing director Shane Craig.

"If they take a single premium PPI policy to cover a five-year loan but pay it off or re-finance after a couple of years, they will have paid to insure a loan that no longer exists. Monthly paid loan PPI policies are the only way of ensuring that borrowers are treated fairly."

Single premium policies are added to total value of the loan upfront, with interest charged on top – clearly not a wise move for borrowers who don't intend to let the loan go to full term.

The ongoing investigation of the PPI market by the Financial Services Authority (FSA) has highlighted the fact that some consumers who settle their loans early are unable to get a refund on the premiums they have paid upfront for PPI*. This is just one reason behind the £1.6m penalties for poor sales practices that have been handed out to lenders by the FSA so far.

In the course of its research, the FSA heard from consumers who were advised to purchase single premium PPI despite the fact that they had told the lenders that they intended to re-finance the loan in the near future.*

"It's clear, in these cases, that the consumer would be better served by opting for the freedom of a monthly paid policy instead of covering the full term of the loan upfront," said Craig. "But not everyone is aware that they have this choice.

"Monthly premiums offer more choice and control for consumers, and are also cheaper," said Craig. "With UK consumer debt levels at a record high, PPI is a very valuable back-stop to prevent people from sliding further into difficulty, but there's a risk that they may lose confidence in the product if they think they are being ripped off.

"Putting an end to single premium loan PPI in favour of monthly paid policies would be a step in the right direction."

* Speech by Stuart King, Head of Retail Intelligence and Regulatory Themes, FSA 14 March 2007