PPI and car finance explained

PPI is short for payment protection insurance. It’s a type of insurance that aims to protect you if you’re unable to work and can no longer afford to make your car finance repayments. If you were to fall ill or be made redundant, your PPI policy would kick in and cover the cost of your credit repayments, such as for mortgages and credit cards. Because of mis-selling in the past, PPI is no longer bundled with car finance.

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Is there PPI on car finance?

The practice of adding PPI to your car finance package was banned in the UK in 2009 after the discovery of widespread mis-selling. PPI itself wasn’t the issue. The problem was that many people were unknowingly sold the product, while others simply didn’t need it or couldn’t benefit from it. PPI, or loan/income protection as it is more commonly known today, is still available from independent insurers and is used by those who actively choose to indemnify their credit agreements, which can include car finance.

Why was PPI car finance mis-sold?

PPI mis-selling has hit the headlines in the UK many times over the last 10 years. Before 2011, car finance loans could be offered in a bundle alongside several other products. These bundles often included PPI. However, investigations into the selling of these products in the car finance industry and other financial services found that PPI wasn’t always sold correctly.

PPI was sometimes sold to customers who didn’t need it, didn’t know that it had been included in their loan, or weren’t eligible for the policy due to their employment circumstances or other restrictions.

As a result of these investigations, those affected by PPI mis-selling were eligible to claim compensation.

Can I make a claim for mis-sold PPI?

Unfortunately, if you believe you were mis-sold PPI in the past, the deadline for claiming compensation has now passed. However, there are exceptions, and you may still be eligible to claim if your policy was sold after 29th August 2017 or you submitted your claim before 29th August 2019.

Should I consider taking out PPI on car finance?

This depends on your individual needs and circumstances. You may feel that PPI car finance is worth getting if you’re concerned about keeping up with your loan repayments in the event of illness, injury, or unemployment.

However, your suitability for this type of insurance will depend on your personal financial circumstances. You may also have insurance (e.g., critical illness protection) in place already that could step in to cover your car finance payments if you were to fall ill. If you’re not sure whether PPI is right for you, you could seek advice from an accredited independent financial adviser, or an insurer authorised by the Financial Conduct Authority (FCA).

What other types of car insurance are there?

In the UK, you must have car insurance before driving a vehicle.

There are three main types of car insurance:

Fully comprehensive

Fully comprehensive insurance will protect you, your vehicle, and other drivers from any damage that you cause, as well as covering repair costs, medical expenses, fire damage, and vehicle theft. Depending on the policy you choose, it may also compensate you for legal costs and accidental damage.

Third-party, fire, and theft

The next level down from fully comprehensive is third-party, fire, and theft insurance. In the event of an accident, this policy will cover other people’s costs, their cars, and their property, and protect you if your car is stolen or damaged by fire.

Third-party insurance

The minimum level of insurance you can have in the UK is third-party. A policy like this will only cover damage caused to other people, their vehicles, and their property.

Can I get car finance with insurance included?

You may be able to find a car finance loan with insurance already included. Typically, insurance packages are only available when buying a brand-new car, but some car finance providers can also offer all-inclusive deals on used vehicles. In this case, your monthly insurance premium would be combined with your car finance repayment. Other packages may include servicing and maintenance, which can also be incorporated into your monthly repayment.

This option may seem appealing if you struggle to keep track of your different payments and would appreciate the simplicity of having all your payments in one. However, you may not have access to the full range of policies if you choose an all-inclusive package.

What is gap insurance?

Gap insurance (otherwise known as guaranteed asset protection insurance) is a type of cover that is closely related to car finance. Except for classics and rare collectibles, all cars depreciate over time. Your standard car insurance will compensate you if your car is written off or stolen, but only to the tune of what the car is currently worth, which could be a lot less than you originally paid or financed. That means when you go to replace your car, there’ll be a gap between the amount you originally spent (or still owe to your finance provider) and the budget you have now. As its name suggests, gap insurance is designed to plug that gap.

Should I get gap insurance?

Gap insurance is optional. If you have car finance, it might come in useful as you will be expected to continue making repayments on your loan if your standard insurance payment doesn’t cover the full amount, even if the car’s been written off. In this case, you could be left having to cover two finance payments each month – one for your old car and one for your new vehicle – or left without a car at all. This could be particularly important if you have bought a nearly new vehicle that’s only two or three years old and is losing value quickly.

What can I do if my car finance agreement has been mis-sold?

Car finance agreements can be classed as mis-sold if you received poor advice, weren’t fully informed, or the potential risks weren’t made clear enough. It’s the lender’s responsibility to make sure that your car loan suits you and your individual circumstances. They should also complete thorough affordability checks and let you know if they are earning commission from the transaction.

With PCP, you may have been mis-sold if you were not made aware of the balloon payment or were misinformed about any restrictions that come with the deal, such as mileage limits. If you are worried that your car finance has been mis-sold, you can speak to your finance provider directly or escalate your concerns to the Financial Ombudsman.

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

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