Forget the APR - How Much is the Insurance?

The previous article covered high interest rates for those with poor credit records: the other scandalous rip-off involved with lending money is the unbelievable difference in the cost of loan insurance.

Loan insurance, unlike expensive loans for poor credit records, does not make a distinction between high and low risk borrowers. However, where as a low risk borrower can easily refuse all attempts from the lender to take out the loan payment protection insurance premium, high risk borrowers feel obliged to accept the payment protection insurance as a 'sweetener' to the loan company for a favourable decision on receiving the loan.

Further, if the lender and the borrower create and administer the loan over the telephone, the outward pressure from the lender, during these telephone calls, can be intimidating to say the least.You may also find that the loan administrator will have up to three different insurance schemes.

For example:

2. Second target = Just redundancy cover

3. Third = Death

The most expensive being number 1, and the least expensive being number 3. The main point here is that you probably say no to 'any' insurance, but the lender continues down the list of options. The lenders would argue that the customer is entitled to know the full range of insurance options. The customer, especially one with a poor credit limit, is almost certain that the insurance is a condition of the loan being accepted and is therefore more likely to accept some form of insurance. Where the total transaction is covered by form filling, the borrower is still self-pressured to request insurance cover. It would be naive to believe all that the lenders have to say about the insurance having zero affect on the loan decision.

Of course, interest cover is useful if redundancy, illness or death is 'likely' to occur during the time of the loan. But, is a similar policy with a standard insurer for critical risk policy a lot cheaper?

A recent article in The Sunday Times reports that 'respectable' lenders are charging between 600 and £1800 (eighteen hundred) for a £5000 loan payable over three years:

This means that for every £2.78 you borrow, you pay £1 for the insurance.

Add to this the interest payable on the loan, you then pay £1 for every c. £1.50 you borrow.

What you will also find in many cases is that interest is charged on the insurance premium: YES I did write, "interest is charged on insurance premiums".

What can you do to make the right decision?

First, ask for the absolute total amount payable from the lender. To include the loan: loan interest, payment protection insurance, and payment protection insurance. Judge the total figure with other lenders absolute total payable: are you now getting the point about the APR not being the main issue?

Second, ask friends and family if they have had any good or bad experiences with lenders.

Third, visit the personal finance web sites and look for reports, loan rates and insurance details of the leading lenders.

Finally, act with confidence, not bullish, and remember, you are the customer that the lenders rely on to make money. Lenders know that some risk is present in almost every loan deal.