The abbreviation PPI, as used in the business and insurance context, refers to Payment Protection Insurance; which is alternatively referred to as Credit Protection Insurance in some circles. The workings of PPI are quite easy to understand once one appreciates the workings of the lending process, in which PPI comes up. As it turns out, lenders give money – or whatever commodities they are lending – to borrowers on the understanding that the borrowers have the capacity to service their debts as the payments fall due. In case the borrower is an employed person, it is assumed that they will have the capacity to honor their obligations to their lenders as they fall due – as long as they hold their jobs.

But should the borrower lose their job, it is appreciated that they might not be in a position to honor their obligations to their creditors as well as they did while they had their jobs, in spite of their best efforts. The same case applies to people in business, where lenders advance various forms of loans on the understanding that the business people are expected to be in a position to honor their obligations, as long as the business keeps performing well. But should business go down, it would be reasonable to expect that the borrower-businesspeople would have difficulties in honoring their obligations to their lenders.

Now in the event of a person being unable to honor their credit obligations, a number of things can take place. In case what we are looking at is a secured loan, the borrower could have their security auctioned to cover for the loan, though creditors – aware of the mess this type of things tend to cause – are often reluctant to go down the auction route, leaving it as a last option. And in case what we are looking at is an unsecured loan, the lender would simply have to write it off, or start hustling the people who guaranteed the borrower for its payment (in case the loan is based on personal guarantees), all these also being rather messy undertakings, especially if the reason for the borrower’s inability to repay the loan is something like an illness which has reduced the lender’s earning capacity, or worse still death, which leaves the loan un-serviced; circumstances to which lenders are surely expected to be sympathetic to, were it not for ‘the business side of things.’

To prevent all those messy situations, Payment Protection Insurance comes in. Here, the person taking up a loan or an overdraft from a bank is advised to take up the payment protection insurance cover alongside the loan (to be paying what are considered ‘small’ premium payments for the PPI), under the agreement that should they fall ill, get injured, loss their job (or business) or be overtaken by death before they can finish the loan repayment, the payments from their PPI would cover the rest of the loan, so that they or their loved ones don’t end up being pushed by the creditors for its repayment; while they are completely unable to service it, which can be rather distressing.

Unlike other types of insurance that are typically sold by insurance companies, PPI is usually directly sold banks and other organizations involved in lending. But since there is no certainty that the events being insured against will take place (in many cases they actually don’t), total PPI premium is typically just portion – usually between a quarter and a third – of the total amount borrowed.

As with other forms of insurance, it is important to read the PPI agreement – especially the fine print – carefully before taking it up, because there are usually many other ‘nuances’ to it, like where PPI taken to cover a loan against unemployment only covers repayments for a finite amount of time after the borrower loses their job, rather than covering for the whole remaining loan amount; or where a person loses their job after having been given proper notice is denied their PPI benefits in spite having – in all honesty – lost the means with which they could continue honoring their debt obligations, the very thing they took PPI to protect themselves against.