Payment Protection Insurance

Meaning and Definition

Payment Protection Insurance (PPI), also referred to as credit insurance, is an optional insurance product offered alongside car finance agreements. PPI is designed to provide financial protection to borrowers in case they are unable to make their loan or finance payments due to certain circumstances, such as illness, accident, unemployment, or death. PPI may cover the borrower's repayments for a specific period, usually up to a maximum limit, offering peace of mind and financial security.

Why it is important to know

Understanding Payment Protection Insurance is important for borrowers considering additional protection and coverage for their car finance agreement. PPI provides a safety net in case the borrower faces unexpected financial difficulties that prevent them from making their loan payments. It can help ensure that the borrower's financial obligations are met during challenging times. However, it is crucial for borrowers to carefully review the terms, conditions, and coverage of the PPI policy, as well as its cost, to determine whether it aligns with their needs and provides adequate protection.

Example in car finance

Suppose an individual obtains a car finance agreement with monthly payments of £300. As part of the car finance process, the lender offers Payment Protection Insurance (PPI) coverage. The individual decides to opt for PPI to provide additional security in case they are unable to make their loan payments due to unexpected circumstances, such as job loss. The PPI policy specifies that in the event of unemployment, the policy will cover the borrower's loan repayments for up to 12 months. The borrower pays an additional monthly premium for the PPI coverage, ensuring that their loan payments are protected in case of job loss during the covered period.