Payment Protection Insurance
It is common for applicants to be offered Payment Protection Insurance (PPI) when they apply for a car loan. PPI covers the cost of repayments on your loan if you are made redundant, or must stop working because of accident or illness. Some policies may also include life cover, which would pay out if you die before repaying the loan. PPI is an optional insurance that you can purchase alongside your car loan, but does not have to be purchased from your car loan provider. Ensure that you shop around to get the best quote before accepting your lender's offer. In the past, many people were under the false impression that they would only qualify for a car loan if they took PPI too. Lenders cannot reject your car loan application solely because you did not purchase their PPI policy.
The cost of PPI is not included in the standard APR calculation (see Interest Rates). You must pay a premium on top of your loan repayments. This premium varies depending on how much you are borrowing, but could significantly increase the cost of your car loan. Usually you will pay a regular monthly premium, but some lenders will offer you the chance to make a one-off PPI payment, which can be added to the loan amount. This means that the premium earns interest in exactly the same way as the loan amount, which can increase the total cost of your loan. In most cases, a regular monthly premium is the cheaper option.
Before you take out a PPI policy, consider whether or not you already have insurance that covers you, such as income protection insurance which provides an income if you are unable to work due to accident or illness. Read the PPI policy documentation to ensure that you aware of the limitations and exclusions before you purchase, since features, terms and conditions vary between insurers. By law, you have a fourteen day cooling-off period within which you can cancel the policy and qualify for a refund. After this period, you may cancel, but there are usually administrative charges; again, refer to the terms and conditions booklet, or contact your lender directly if you are unsure.
Limitations and Exclusions
PPI will only cover your loan repayments for a set period of time: typically eighteen months. Usually, you must have been employed for at least twelve months if you wish to make a claim. Some policies will not cover you if you are self-employed, have certain illnesses or conditions, such as back problems and stress, or a pre-existing medical condition. In addition, most policies will not pay out immediately after you make a claim.
On average, you must wait 30 days before the policy will cover your loan repayments; in many cases you may need to find alternative finance to cover a least the first payment you would miss. Once you have made a claim the policy is usually void, meaning future claims from the insurance are not possible. If you are confident that your financial situation will not change and affect your ability to repay your loan, you may consider this insurance an unnecessary expense.
