Front Loaded PPI on Loans

Previously, instead of selling PPI policies under which the consumer pays a monthly fee for PPI cover, many loan providers would sell a type of PPI policy known as a “single payment PPI policy” or a “front loaded PPI policy”. This involved calculating one large premium, often thousands of pounds, which was to be paid in advance for the policy, and adding this to the total loan amount.

This was often extremely bad value for the consumer because the PPI element of the loan accrued interest which was added to the outstanding debt and, over the lifetime of the loan, the consumer might pay double or even triple the original PPI premium in additional interest. Because of this, salespeople would often try to persuade consumers to take out these types of policy even if they were completely unsuitable.

If our clients have ever had a loan of any type, either from a bank or building society or as part of a care finance package, they may have a PPI claim. Even if they do not think that they were sold PPI, they should still investigate further because tens of thousands of people have had PPI added to their loans by commission-hungry salespeople without their knowledge.

Insider Secrets on How PPI is Sold with Loans

The total paid back on a loan is roughly 18% PPI, 22% interest and 60% the original amount borrowed.

PPI Interest Pie Chart

PPI Payment Example

  • Month 1 – 17 pays off PPI @ £220.76 pm = £3500
  • Month 17 – 36 pays off interest @ £220.76 pm = £4000
  • Months 36 – 84 pays off original cash amount @ £220.76 pm = £10,000

When a loan is taken out the PPI will normally be paid back first then any interest due and finally the cash amount borrowed. So you can see why PPI may not always be favourable to the client.

Inside secrets on Insurance vendor commissions:

  • What percentage of the cost of the PPI policy goes to the Lender and what percentage goes to the Underwriters?
    • 90% seller 10% underwriter
  • Following the example above on the 10k loan the PPI value was £3,500
  • £3,150 goes to the seller (company)
  • £350 goes to the underwriter

As in this article in the Guardian on Plevin vs Paragon Personal Finance demonstrates another reason why the banks have put aside billions to compensate people that have been mis sold PPI.

Check for Mis Sold PPI

Typical Story of a PPI Sale

Mr Jones goes to his local branch of Lloyds TSB for a loan of £10,000 to buy a car:

  • Without PPI he was quoted for a loan of £10,000 over 7 years, he would pay £3000 interest making his repayments £154.76 per month paying back a total of £13,000.
  • He was advised to take out PPI, so in the event of accident, sickness or redundancy his monthly payments would be covered.
  • The average PPI value on a 7 year loan for £10,000 is £3,500.
  • Mr Jones in agreeing to this, now has a loan for £13,500 without however the full cost being fully explained to him.
  • In addition it was not explained interest will be charged on the extra £3,500 this is at the same rate of his loan which would add an extra £1,000 making the total he repays £17,500, his monthly repayments have now increased to £208.33.
  • Mr Jones is paying an extra £53.57 per month over 84 months making up an extra £4,500 over seven years.

But he can be rest assured his monthly loan payments will be made no matter what happens?

Related Pages:

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