When you arrange a loan, it may include add-on products, like payment protection or mechanical breakdown insurance. Read this guide to understand the different types of add-on products and important lender obligations.
Add-on products are products that are sold at the time you take out a loan. They can provide cover if you can’t make your loan repayments, or if your property is damaged.
Add-on products are most common when you take out a car loan. They can also be sold when you arrange finance company loans or a mortgage.
It’s important to know your rights if you are offered add-on products. You may think you have to take out the products, but they can be optional.
Lenders need to make sure any add-on products are suitable and affordable for you. Knowing what the lender needs to do can help you understand if you’ve been treated fairly.
Mr Iago’s* suitability stress
Mr Iago had an accident and couldn’t work. Mr Iago made a complaint after the lender told him he did not have Payment Protection Insurance (PPI) as part of his lending for his truck. Mr Iago thought he had taken out PPI cover when he arranged the loan. Instead, he had been provided with GAP insurance.
The IFSO Scheme reviewed the complaint and the lender confirmed it was unable to show that it had assessed the suitability of GAP insurance for Mr Iago.
Mr Iago and the lender agreed to settle the complaint. The lender paid Mr Iago the amount of payments that he would have been entitled to, if he had PPI cover. The lender arranged PPI cover moving forwards. Mr Iago agreed to pay the premiums for the cover that had been arranged.
Ms Bea’s* information complaint
Ms Bea refinanced a loan with her lender to buy a new car. The loan contract included premiums for Payment Protection Insurance (PPI). Ms Bea made a complaint after she asked the lender to cancel the PPI policy. The lender said she could not cancel it, because it was a condition of the loan. Ms Bea said she did not know that it was a condition of the loan. She said, if she had known, she would have tried to get a cheaper policy somewhere else.
The IFSO Scheme confirmed the lender could require Ms Bea to take out PPI cover, because there was a risk that Ms Bea would not be able to repay the $5,000 shortfall, if something unexpected happened.
However, the lender couldn’t show it had helped Ms Bea to understand the PPI cover. It could not show it provided her with important information about the cover. Ms Bea was not able to get insurance cover through a different insurer. Therefore, the IFSO Scheme decided that the lender should not charge interest on the PPI premiums. The lender made a payment to Ms Bea’s account for the interest she had already paid on the premiums.
*Names have been changed
Add-on products can include:
Credit contract indemnity insurance (CCI) and repayment waivers are also add-on products with features that can be like PPI insurance.
Lenders must ask you questions, review information, and check whether an add-on product is suitable for your circumstances. They should explain to you the risks that might require cover and the length of time you might need cover. The lender should also make sure the total amount you will pay for the add-on product is not excessive compared to the loan amount.
The lender should also make inquiries to assess that you can make the add-on payments without causing you substantial financial hardship.
A lender can sometimes require you to take out an add-on product as a requirement of the loan. It can only do this if it is reasonably necessary to protect the lender.
For example with a car loan, if you will still owe money on the loan after your car is sold, the lender may look at how you will repay this amount if something unexpected happens. The lender may say you need Payment Protection Insurance to make sure the full loan will be repaid if anything happens to you.
When you arrange the add-on product, lenders need to provide you with important information and make you aware of the key features of the product. They might require the insurer to do this on their behalf. For insurance products, important information can include:
The lender must assist you to reach an informed decision about the product. This means it should make you aware of what it means to enter into the contract and your responsibilities.
If a lender hasn’t met its obligations, there may be remedies available, including compensation.
I think my lender should not have sold me the add-on product – what do I do now?
You can request a review through your lender’s internal complaints process. If you are unhappy with the complaint response, you can ask the IFSO Scheme to investigate your complaint, for free.
If you would like the support of a financial mentor to help understand your circumstances, you may wish to contact Moneytalks. Moneytalks is a free service that supports people and whānau to manage their money and obtain the financial support they need.
You did not know you were paying for an add-on product
Your lender must let you know about the add-on product and provide you with important information about it.
If you don’t remember agreeing to pay for the product, or you did not receive information about it, then your lender may not have met its obligations. You can make a complaint to your lender to have this review. Your lender should have records to show what happened when you took out the loan.
You’ve tried to make a claim on your add-on product and it’s been declined
An insurance product may not be suitable for you if you could never make a claim on it. For example, your age or employment status might mean you could never successfully claim under a policy.
If the cover provided by the add-on product is not suitable, you should make a complaint to your lender for this to be reviewed.
The amount you are paying for add-on products is very high
When you arranged the add-on product/s, your lender should have considered whether the overall costs of the product were suitable for your circumstances.
If you believe the costs of your add-on products are very high compared to your loan amount, you should make a complaint to your lender for this to be reviewed.