Payment protection insurance is currently in the spotlight owing to the involvement of the FSA in cases of misselling. Julian Hall explains the cover and invites you to test your knowledge of it

In recent years there has been an explosion in the amount of credit advanced to borrowers.

Traditionally, credit was largely restricted to house purchase, sometimes coupled with home improvement finance, with loans additionally available either through overdrafts or personal loans for the purchase of cars or overseas holidays and other major items.

Over the past 20 years or so lending institutions generally have relaxed their lending criteria and this, coupled with low interest rates, has meant a substantial increase in borrowing.

In addition, the popularity and increased availability of credit cards and retail offers have led to a huge increase in demand for consumer credit and thus a rise in debt. The high level of consumer debt is unprecedented.

At the end of 2004 there was approximately £1,000bn outstanding on mortgages, loans and credit cards in the UK.

The inability to work because of accident, sickness or unemployment, however, might mean that an individual is unable to finance his borrowing and repay the debt.

The Royal Society of the Prevention of Accidents advised that in an average year nearly three million people suffer injuries at home that warrant a visit to the accident and emergency department of their local hospital.

Government statistics show that over 750,000 people were made redundant in 2003.

Payment protection insurance (PPI) is available to provide cover for loan payments in the event of an inability to work because of accident, sickness or unemployment.

In essence, a PPI policy seeks to replace some of the borrower's income in the event of accident, illness or, in some cases, involuntary unemployment, which is sufficient to meet their loan repayments.

The need for PPI is often overlooked by the borrower. Some members of the public quite erroneously believe that state benefits will provide adequate protection if they fall victim to any of the circumstances set out above and are unable to make repayments on their loans.

There is also sometimes a perception that the cover is complex and expensive.

The take-up of PPI varies considerably according to the nature of the loan. The Office of Fair Trading found evidence in 2006 that the take-up of cover in respect of secured loans was as high as 70%.

PPI, which is also known as creditor insurance, is most likely to be purchased at the same time as the main product- for example, when a loan is negotiated.

This has lead to criticism that PPI has been inappropriately sold by the organisations offering the loans. PPI insurance is not compulsory although lenders will normally say that it is recommended. But they have not always explained adequately the cover provided to the customer.

Premiums may be paid monthly or as a single premium added to the original loan or mortgage. IT

This week's questions come from the AXA Campus course, Introduction to Payment Protection Insurance. This course is of interest to anyone who is new to PPI or seeking to refresh their knowledge of the subject

The material and questions for this course are supplied to AXA Insurance by Searchlight Solutions. If you are interested in using AXA Campus email: julian.hall@axa-insurance.co.uk

Click here to read this week's Q&A.