Call for transparency on loan cover

Consumers who buy payment protection insurance (PPI) from their loan provider could pay almost five times as much for cover as those who shop around, according to research published yesterday.

The policies, which are available to protect most forms of credit, including personal loans, mortgages and credit card repayments, are often sold by lenders but can be bought separately.

Price comparison website uSwitch said it had found examples where buying cover from a high street bank rather than a specialist provider would increase the cost by 467%.

For example, buying PPI to cover the repayments on a £10,000 loan taken out over a five-year period with NatWest costs £3,063.60 direct from the bank, or £656.40 if bought from insurer Paymentcare.

Before PPI is added, interest on the loan is £1,934.60, so taking cover from NatWest increases the cost of the loan by more than 100%.

USwitch has calculated that if the cost of the PPI was included in the lender's APR, in this instance it would rise from 7.4% to 18.7%.

"Consumers who take out PPI with their loan, need to be conscious that the APR increases once PPI is added to the loan amount - in some cases this can be by as much as 11%," said Nick White, head of personal finance at uSwitch.

"More worryingly for consumers, is that the cost is sometimes added to the total amount borrowed and then interest is charged on both."

USwitch is calling on lenders to include the cost of PPI in their quoted APRs to reflect the true cost of taking it and make it easier for consumers who want the cover to compare costs.

PPI also came under the scrutiny of MPs yesterday, when the chairman of the Financial Services Authority (FSA), Sir Callum McCarthy, appeared before the Treasury Select Committee.

Last week the FSA said a mystery shopping exercise had revealed some lenders were at risk of mis-selling PPI policies to customers who would not be eligible to make a claim.

And the committee's chairman, John McFall, criticised the FSA for dragging its feet in getting tough over the way that financial services firms sold the product.

"Something needs to be done urgently," said Mr McFall, Labour MP for West Dunbartonshire. "It seems this problem has gone on and on and nothing has been done about it."

He said the FSA should name and shame firms that are believed to be overcharging customers or mis-selling the policies.

Sir McCarthy agreed there was a major problem and the Office of Fair Trading (OFT) had received a super-complaint from Citizens Advice about the sale of PPI.

But he said the FSA would not name firms until it was certain there was a case to answer and MPs should remember that the organisation had only been responsible for regulating these products for less than a year.

There are an estimated 20m PPI policies currently in force, with around 6.5m to 7.5m new policies taken out every year, generating annual revenues of more than £5bn.