Personal loan borrowers are being advised to watch out for a loan protection trap as lenders rake in millions on commission with frequently inappropriate policies.

As demand for loans soars in the face of mounting consumer debt, new research by broker Stoke Insurance revealed that lenders are employing ‘misleading’ sales techniques in order to persuade borrowers to sign on for the expensive cover to protect loans in the event of unemployment, accident or illness.

According to this latest research, sales are now running at an astonishing 1,000 policies per hour, with lenders raking in a staggering £10 million a day in premiums.

Nine out of ten of the UK’s top ten personal loan firms – including High Street names Barclays, Royal Bank of Scotland and HSBC – automatically included insurance cover in the loan quote when first contacted by mystery shoppers.

And none of the lenders contacted bothered to check whether the customer was self-employed – which could easily invalidate the cover.
"It is bad enough these lenders are not making sure that the potential customer was aware that the initial quote included the cost of monthly loan protection premiums," said Stoke managing director Sara Rosamond.

"But to not even make the most cursory checks on the employment status of the applicant is irresponsible and could easily lull the borrower into a false sense of security," added Rosamond.

In a further indication of how keen the lenders were to close a deal with personal loan cover included, none of the 10 lenders approached in the mystery shopping exercise checked on the applicant’s medical history.

And none advised that pre-existing medical conditions were automatically excluded from loan protection insurance. Huge demand for personal loans has seen lenders raking in enormous profits from selling bolt on insurance policies.

"It’s not that we mind banks making a profit. That is what they are there to do. What we do object to is consumers being talked into taking out expensive cover that is all too often useless," said Rosamond.

"The financial ombudsman also says it is concerned about loan protection sales. On its website the ombudsman states: ‘Most borrowers are urged to protect their loans by taking out insurance to meet the repayments if they become unable to work.

But the people who sell this type of insurance are often not specialists in this field and some have little or no knowledge of the policy terms. Their ‘advice’ will therefore not be of great assistance to borrowers, who may be uncertain what they are paying for and unable to judge whether it is suitable for them.’

"The ombudsman is worried – and so are we," added Rosamond.