Payment protection insurance is adding to people's debt instead of alleviating it, says a report by the Citizen's Advice Bureau (CAB).
It is estimated there are 20 million policies in force in the UK, which produces an annual revenue of a whopping £5 billion for the industry.
Citizens Advice chief executive, David Harker, said: "Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times. People are lulled into a false sense of security, only to find that far from providing protection against an unexpected drop in income, PPI often just adds to their debt problems."
The charity says that payment protection insurance (PPI) offered to people to cover credit card payments in the event of illness or job loss is wrongly offered to people who would not actually be able to claim on it if they did become ill, and is often unnecessarily expensive.
The CAB says found that 85 per cent people of its clients made unsuccessful PPI claims, whilst others were offered policies that caused their debt spiral.
The report found that people already in financial difficulty were offered debt consolidation loans. The loans were then rolled over several times, with a new PPI policy sold each time, causing the initial debt to soar.
The premium paid for some of the policies can be up to 25 per cent of the initial loan. The CAB found that lenders tended to lump the PPI and the loan amount together so borrowers paid interest on them both.
As a result, borrowers often find that the PPI policy does little alleviate their debt. It was found that people borrowing to cover a £1,000 loan saw their debt reduce by only £12 per year.
The CAB has urged the Office of Fair Trading to launch an investigation into the way PPI policies are offered. To read more about Payment Protection, click here.
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