Avoid the Short-term Loan and Insurance Scam

Payment protection insurance (PPI) may sound like a good idea when you take out a personal loan, in fact many banks insist on it, but are you aware of the actual costs associated with PPI and the need to keep your wits about you before you sign on the dotted line? PPI, which in South Africa generally takes the form of short-term life assurance, provides banks with security when providing any type of credit, from overdrafts to, interestingly enough, unsecured short-term personal loans.

PPI or short-term life assurance is controversial for at least three reasons :

1) In some instances, unscrupulous financial service providers don’t inform clients of the need for PPI and simply tack it onto the loan agreement, trusting the fact that people tend not to read all the fine print.

2) When clients are informed of PPI policies or life assurance, they are not given all the details. Factors such as claims requirements and interest rates are barely touched upon, if they are mentioned at all.

3) In some cases, loan providers are not certified to supply any form of insurance, which can render policies invalid when time comes to claim (and result in severely knotted red tape) and is often in contravention of national law.

In South Africa, it’s not uncommon for the interest charged on life assurance attached to unsecured personal loans to reach an astounding 30%. To add insult to serious injury, the premiums can be tacked onto the loan amount, upon which you pay interest. In effect, you end up paying interest twice. Then there is the fact that banks give clients the impression that they have to buy the policy sold by the bank, which is generally very expensive. The truth is that clients are allowed to shop around to find the least expensive short-term policies available. Provided the policy contains cover for retrenchment, banks have to accept it. It’s even possible to use existing life assurance to cover short-term loans, provided of course that retrenchment is covered.

Don’t be fooled

If you apply for credit, of any kind, you need to know your rights, as well as the responsibilities and limitations of your credit provider. Don’t assume that everything the financial advisor tells you is gospel. If insurance is going to be a requirement, find out who the underwriter is; ascertain if the financial service provider is legally allowed to sell you the policy; and insist that you need time to shop around for alternative deals. Find out all you can about various interest rates and premiums and how the two are handled. If possible, pay the two separately rather than in one combined bundle as this will increase your interest.

Always read the fine print. In fact, take all of the documentation home with you to read at your leisure. Ask a friend to read it over if you think you might miss or misunderstand something. Don’t feel pressured to finalise the deal right then and there in the office. You have the right to take your time.