Cash back loans too good to be true?

A few months back, the Nationwide launched its LoanCare product, a payment protection insurance (PPI) that could be taken alongside its personal loans. The idea is that policyholders who take the product with a Nationwide loan will get a 20% cashback on their insurance premiums. (Subject to them meeting certain criteria, of course).

While this may seem like an attractive proposition to anyone considering taking out a loan, according to the financial data website Moneyfacts: "While the prospect of a cash payment from your loan provider may sound attractive, over the term of the loan, better deals can be found.”

Certainly, when bought at the point of sale, the cost of PPI is higher than one would imagine. Salesmen use the trick of quoting your monthly loan repayment figure inclusive of a PPI premium. That means the borrower has to opt out of having PPI.

Also, with PPI premiums taken alongside a loan, these will be charged upfront. Not only will the consumer pay extra interest, but if they decide to settle their loan early, they will be subjected to huge financial penalties.

Simon Burgess from BritishInsurance.com, a specialist payment protection insurance provider, urges customers to fully research all their options before committing to a loan protection policy:

“Consumers could be paying hundreds pounds more than they need to every year for their loan protection insurance” he says, citing recent research* which showed that for cover on a £10,000 loan, paid back over five years, with an average monthly repayment of £233, the Royal Bank of Scotland was nearly seven times more expensive than BritishInsurance.

So, if you are considering a loan, do your sums first. Look at the total cost of the loan with and without the lender’s standard protection insurance and then compare the overall cost for the loan together with a standalone product.

* Source: BritishInsurance.com