Payment Protection Insurance
Although there has been a good deal of controversy surrounding payment protection insurance in recent years, thanks to the efforts of consumers’ watchdog groups and the federal government, lenders are no longer able to simply add it on to your contract when extending credit. However, this has received so much press that many consumers have become confused in the process and have been led to believe that it is something which they don’t need. Nothing could be further from the truth when in fact payment protection insurance is there to protect the consumer as much as the lender!
Understanding Payment Protection Insurance
Many people fear being unable to meet their primary debts such as their mortgage or automobile payments due to being laid off or out of work as a result of illness or injury. Payment protection insurance, often referred to as simply PPI, is a type of insurance product that you can take out when being extended credit. Should you be unable to make payments on that loan due to illness, injury or even being laid off (the technical word being redundancy), PPI will ‘kick in’ based on your policy terms and make payments, all or in part, for a predetermined maximum length of time. Yes, it is true that the lender benefits by not realizing a financial loss but you benefit as well by not losing your property to foreclosure or repossession. PPI provides a win-win solution to eventualities like these.
What You Need to Know Before Buying PPI
As of last year, 2010, it is now illegal for creditors to summarily include PPI on any new credit contracts they extend. Lenders must wait a full seven days before offering you payment protection insurance by one of the insurance underwriters they work with which gives you ample time to do some research to find your own payment protection insurance company. Be aware of the fact that it is your legal right to refuse PPI if it is on the contract and you are free to choose any insurance company or PPI policy you desire. In fact, you are even able to decide whether or not you want to have that insurance in the first place! While it may be in your best interest to purchase PPI to protect your investment, the decision is still in your hands.
Cost of Payment Protection Insurance
PPI is actually based on a percentage of the balance still owed to your lender. A typical amount charged by charged by credit card companies would be $0.89 per $100 still owed. Therefore if you owed $1,000 your PPI payment would be roughly $8.90 a month. If expressed as an annual percentage rate (APR) it would read 10.5%. Again, keep in mind that credit card companies and other lenders are not allowed to include this on your loan contract and must now wait a full 7 days before offering you this coverage. However, if you choose to opt in to their program you are free to do so. On the other hand, if you decide to shop around for another plan which might have lower premiums you now have the time to do so. Just remember that the more money you owe, the higher your PPI premiums will be.
While it might seem like an expense you don’t really want to take on at the moment, carefully weigh the consequences of what could happen should you be temporarily unable to make timely payments due to illness, injury or unemployment. Unless you have a sizeable nest egg set up somewhere to call upon in times of financial hardship, PPI might offer you the protection you need against losing everything you have worked so hard for. In the end, the choice is yours.