PERSONAL loan contracts are set to become more transparent which means many borrowers will be surprised to find how much they are paying unnecessarily. Some people may find they overpay €2,000 or more.

Under the current system lenders are allowed to give quotes for loans which include the cost of payment protection insurance (PPI). They are not obliged to tell the customer that the price of PPI has been built into the quote, which leads many borrowers to buy the added cover. The policies can add as much as €2,150 to the cost of a five-year loan.

Ifsra, the financial regulator, proposes to ban lenders from quoting PPI and loans together under its draft consumer protection code.

“This is a very important issue as PPI is expensive and is suitable only for certain people,” said Jill Forde at Ifsra.

“Many borrowers are under the illusion that they are obliged to take these policies with their lenders. Don’t forget that lenders earn commission on the sale of PPI.”

The insurance covers monthly loan repayments for policy holders who fall ill or are made redundant and most products will also clear the person’s loan if they die.

“Many consumers are already covered by work benefits, serious illness cover or income protection and they end up paying out hundreds of euros unnecessarily,” said Forde.

“Borrowers should be aware that this cover is not for everyone. For example, if you are taking out a small loan and your job is secure, you probably don’t need PPI. Sit down and do the maths. Look at the cost versus the level of protection.”

A typical five-year policy costs €25 per month. The cost and the amount of cover varies between providers.

A survey carried out by Ifsra reveals that a person with a five-year €10,000 loan received quotes for PPI varying from €503.50 to €2,153 over the full term, a difference of €1,649.50.

ACC Bank was the cheapest provider, but its policy covers the loan only in the event of death. Premier Direct was the next most competitive provider quoting €1,001.48 and it offers full protection. GE Capital Woodchester quoted the highest premium.

Brian Leslie, the managing director at PrimaFinance.ie, says that payment protection is suited to those who do not have a rainy day fund or people working in a volatile sector, such as the IT industry.

“Anyone who has savings equivalent to six months’ salary does not need PPI,” he said. “A person with less than this amount may want to consider some level of protection.

“Similarly, someone who is not in permanent employment with a solid company is also vulnerable and paying for cover probably makes sense. The policy can always be cancelled after a year when they are more financially comfortable.”

Leslie adds that borrowers should do their homework first. It is important to compare the products on the market and find the policy that best suits their requirements.

There are alternatives to PPI and Ifsra suggests that people should consider other products, such as life cover and permanent health insurance, before making a decision.

Leslie agrees that permanent health insurance — otherwise known as income protection — suits self-employed people and company directors as it protects their income until they are able to return to work or retire. Policy holders are also eligible for tax relief on their premiums.

Even if a person decides to take out PPI, they may not be accepted by the insurance companies.

Many providers have a list of terms and conditions that must be met before you can take out a policy. For example, EBS states that the person must be in good health, aged between 18 and 60, and be in six months continuous, permanent full-time employment.

Set criteria must also be met by those looking to make a successful claim. Most policies cover a specific list of critical illnesses so if you are diagnosed with an illness that is not listed, money will not be paid out. Anyone with a pre-existing medical condition should also read the fine print carefully as these are usually not covered.

If you decide to take out this type of cover, beware of any provider who asks that the full premium cost be paid upfront. You may have to borrow the cost of the insurance and then interest will be payable on the premium as well as the loan.

Michael Kilcoyne, the chairman of the Consumers’ Association of Ireland, says the association is delighted that Ifsra is banning PPI providers from quoting the product with loan figures.

“There is a serious need for greater transparency in this area. Consumers have a right to be able to calculate the cost of financial products. Under the current system, this is virtually impossible and that cannot continue.”