Personal loans unprofitable without PPI

by Gill Montia

Story link: Personal loans unprofitable without PPI

The Competition Commission’s enquiry into payment protection insurance (PPI) has revealed that the large profits made by banks from selling PPI alongside personal loans have been propping up unprofitable lending.

PPI is sold to cover repayments on loans, mortgages and credit cards should a borrower lose their job or become too ill to work.

The Office of Fair trading has already found evidence that the market is uncompetitive and that PPI has been sold to people who cannot claim on their policies.

The matter has been referred to the Competition Commission, which estimates that banks’ revenues for PPI sales are between £2.2 billion and £2.6 billion a year.

The Commission’s working paper concludes that: “The personal loans business has suffered from declining profits in recent years to the point where in 2006, it appears to have been loss making before taking into account income from PPI. With PPI included, the sector appeared to have been marginally profitable … this appears to be a recent phenomenon: the evidence suggests that prior to 2005, the personal loans sector was profitable, even without PPI income.”

Adding: “When viewed as an add-on product, PPI distribution is highly profitable. Distributors earn a high proportion of the total income from PPI premiums and in comparison the additional costs incurred in selling PPI are low.”

In fact, lenders selling PPI can expect to earn £1,200 from a policy that costs £20 to provide.