PPI Crackdown May Be Threat To Loan Costs
The mission that the Competition Commission are on to change the face of payment protection insurance could have negative connotations for those that want to take out a loan. It could make them considerably more expensive.
PPI covers a borrower if they find themselves unable to repay their borrowing because of being out of work. The Competition Commission want a period of 14 days to exist between lenders selling loans and lenders selling PPI. This is because borrowers can obtain PPI far cheaper from independent insurance companies. The Competition Commission feel that borrowers are not being given the opportunity to do this when given the hard sell on PPI by financial institutions that they borrow from.
The problem with this though is that lenders rely on the money that they make from PPI to offset the low rate that customers are given with their borrowing. If they do not sell PPI to customers then the only option is to increase the cost of borrowing.
The PPI market as it stands is worth an estimated 3.5billion to the various financial institutions in Britain and if they cannot make this sort of money through PPI then they are going to have to seek alternative methods through which to recoup this loss.
And the people that are in the know are really sceptical about the Competition Commissions proposals because they know that the outcome will be the cost of borrowing increasing by several per cent as opposed to some marginal amount.
If loan repayments go up by as much as £100 a year then borrowers are not going to be happy with that. A 2% increase on a loan of £10,000 over 5 years would see the monthly payments rise by approximately £10 which certainly is not a good thing.
It has thus far been a case of cross-subsidy from the insurance that customers pay. If PPI is removed then this will no longer be the case. It is good that the Competition Commission has been investigating PPI over the last two years in an effort to benefit the consumer but the changes that they are proposing could have a negative effect overall.