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Payment protection insurance - Choose carefully.

If you're considering taking out a bank loan, applying for a mortgage or looking for any other type of credit or finance, such as catalogue goods or store cards, you might also want to consider how you would manage to repay your debt if you were to lose your primary source of income for any reason. This could happen as a result of injury, illness, unemployment and a whole host of other reasons, most of them, unfortunately, unforeseeable. Missing repayments can be a very costly business. Penalties may be applied, preferential interest rates can be withdrawn, and your credit rating can be damaged. If you have no other source of income that could ensure your regular repayments, PPI could be just what you need.

Finding out what is PPI and how it might affect you is an essential first step to making an informed decision. It stands for 'payment protection insurance' and guarantees loan repayments in the event that the borrower has difficulty in paying them due to a variety of reasons as specified by the policy. Most PPI policies are valid for a year and can be paid in a single payment or, like the loan or credit, be paid in monthly instalments.

Different policies suit different circumstances. Some policies will cover repayments in the event of unemployment but not through resignation or dismissal due to certain legal reasons, such as theft, for example. Some are designed for retired people while others have an early cut-off maximum age limit. Some are designed for the self-employed. Some exclude claims due to pre-existing health conditions while others are more accommodating in that area.

With all those variables, it's essential that you buy one that is suitable. You can buy PPI from many insurance or finance companies, all with their own conditions, exclusions and prices. Whichever company you buy it from, the salesperson will ask about your personal circumstances in order to ensure that the policy is suitable Always ask questions if you're not completely sure about what the policy covers.

When you make the application for your loan or credit, the bank or company will probably offer you their own PPI product. That can be a very convenient way to do it, but you're under no obligation to take it. It's an optional extra, and the lender won't make your refusal to take their PPI product a reason for refusing your loan application.

Until recently, many high street banks and other lenders were intentionally not making those points clear enough in order to push their own PPI on customers making loan or credit applications. This has been legally ruled as mis-selling and, as a result, the banks and the companies are now paying out billions of pounds in refunds to millions of UK customers. It's a safe bet that any PPI policy you buy will now be explained fully with no further attempts made to mis-sell a policy that is unwanted or unsuitable.

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