Beware loan protection insurance

CONSUMERS are being warned of the perils of loan payment protection insurance after one man paid £8,884 for just 14 months' insurance.

Tony Challinor took out a £10,150 payment protection insurance policy when he applied for a 20-year £35,000 loan with Paragon Finance in July 2003.

The Shrewsbury-based robotics engineer was told he would receive a rebate of £10,000 when the loan expired from the broker who handled his case, Easy Loans.

He said: 'It seemed unusual but like a good deal so I went for it. It would mean I only paid £150 in total for the whole of the loan.'

However, after receiving an inheritance windfall following the death of a family member, Mr Challinor decided to pay off the loan.

He was shocked when he was given a settlement figure of £44,943.92 by Paragon. The figure included the remainder of the insurance policy, early settlement interest and legal and discharge fees.

To make matters worse, after reading the small print, Mr Challinor discovered the insurance policy actually only covered the first five years of the loan's duration.

Mr Challinor had originally only planned to borrow a small amount to pay for replacement windows for his house but was persuaded by an Easy Loans broker to consolidate £15,000 of existing loans plus a £7,000 endowment loan.

Mr Challinor claims the broker also persuaded him to borrow an extra £10,000, taking the total loan to £35,000 and outside of the remit of the Consumer Credit Act, which regulates loans under £25,000.

He said: 'I know it was stupid to take the extra money but we needed to replace the car and certain other items and was told it would lower our APR if we went up to £35,000.

'We've already paid off £7,000 since taking out the loan, so if we pay off the settlement figure that will take us over £50,000. It's taught us the lesson, always read the small print.'

Paragon said the responsibility for the sale of the loan and the payment protection insurance was with the broker, Easy Loans. 'We simply supplied the funds,' said a spokesman.

However, Paragon has offered to knock £1,000 off the final bill as a goodwill gesture. Easy Loans declined to comment.

Richard Mason, director of price comparison website insuresupermarket.com, claimed consumers should avoid taking payment protection insurance from their lender.

He said: 'What these lenders do is loan you the total cost of the premiums at the start of the loan and then you pay that back rather than paying on a monthly basis.

'Payment protection insurance is probably the biggest scandal in financial services after pensions and endowments, the difference being that few people seem to realise it. My advise would be to never, ever take it out from a lender.'

He added a number of specialist lenders have started offering insurance loans that can be claimed back when the loan expires.

'It's something that has come over from the US, but unfortunately the period to make a claim is often small or people lose their paperwork.'

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