Calculating PPI (Payment Protection Insurance)

The economic climate has been turbulent for the past few years. With all the uncertainty, many people have been turning to services that offer insurance on debt. Payment protection insurance, or PPI, is a type of insurance coverage for the repayment of loans in the event that the borrower loses a job, his or her circumstances change so that he or she can no longer earn an income to repay the debt, dies, or becomes ill/disabled. Synonyms for this type of insurance are loan repayment, credit insurance, and/or credit protection insurance.

 

Many of the varying kinds of consumer loans are able to be covered under a PPI policy. It is pertinent to note that while the individual applying for the loan or line of credit pays the premiums on the policy, the creditor is the beneficiary, or entity that receives the payment of the claim. In addition, it can be tailored to pay out only in the event of a specific circumstance occurring.

 

Most PPI policies will only cover the minimum payments of loan for a finite period of time, most often 12 months. Determining whether this type of coverage will truly benefit an individual is not a matter of straightforward analysis. Add to this the fact that many individuals who have this insurance do not truly understand what actions will cause a claim on the policy to become null and void, and clearly PPI is not for everyone.

 

Calculating Cost Of PPI For Loans

Its important to remember that calculating the payment for PPI is not a universal formula for all lenders but left to the each lender’s discretion. There have been surveys of leading lenders that show the cost of a PPI policy ranged between 16 to 25 percent of the debt. Therefore, calculating PPI is as easy as the amount of debt times the percentage charged by the insurer.

 

However, because of there are different methods to pay for this type of policy, PPI calculations are not always straight forward. The two principal methods are either monthly premiums or a single premium. For most choosing, the latter method means adding the amount of the PPI premium to the initial amount of the debt at the beginning of the loan term. When opting for this method, it is necessary to note that if the premium is added the debt amount, the APR is also applied to the premium thereby increase the cost of the PPI over the length of time that it takes to repay the loan.

 

Monthly premiums ensure that the policy holders are not paying an interest rate on the cost. While this does save in the total amount that is paid for the PPI, there are other concerns that are inherent with this method. This method increases the chances voiding the policy. Missing payments would cause this to happen, whereas with adding the single premium to the total loan amount at the beginning ensures that the individual does not have to worry about voiding out his or her policy due to no payments.

 

PPI Calculator For Credit Cards

When it comes to a PPI refund that is linked to a credit card, the method of paying for the premiums of these policies is to add the premium each time the recurring monthly payment is due. The percentage for this type of PPI is between 0.75 to 1 percent. In other words, for every hundred remaining on the revolving balance an extra $0.75 to $1 is added to the amount due prior to the interest being applied. Therefore, when attaching a PPI policy to a credit card there is no way to pay the premium without having to pay interest, as well.

 

Calculating PPI premium costs are simple when the premium can be utterly detached from the interest rate being applied to the debt amount. However, the calculation becomes complex when interest rates are involved. There of course, is an increase in cost, but what many do not understand is that this increase grows at a rate that increases itself over the length of time that instalments are being made. This should always be considered when trying to determine whether or not a claim for mis sold ppi will truly be cost effective for an individual.