Payment protection insurance for consumer credit: protection or a costly trap?
22.10.2025
10
Minutes
Katrin Straub
Managing Director at nextsure
A consumer loan can finance your wishes, but what happens if you lose your job or fall ill? Payment protection insurance promises peace of mind, but it can push the overall cost up by more than ten per cent. We show you when this cover makes sense and which better alternatives often exist.
The topic in brief and concise terms
Payment protection insurance can increase a consumer loan by ten to 20 per cent, as the costs are often financed along with it.
Numerous exclusion clauses and long waiting periods significantly restrict the benefits in the event of a claim.
Alternatives such as term life insurance or income protection insurance often offer better cover at lower cost.
Understanding the basics of payment protection insurance
Payment protection insurance, often also called residual debt insurance, is a voluntary policy. It is designed to cover your loan instalments in the event of unemployment, incapacity to work or death. The cost, often ten per cent of the loan amount, is usually added to the net loan amount. This means you also pay interest on the insurance sum, which significantly increases the overall cost. A cover for personal loans should therefore be examined carefully. This cost structure often makes a transparent comparison difficult. Analysing the exact costs is the next logical step.
Weighing costs and benefits in practice
The cost of payment protection insurance for a consumer loan can make the loan considerably more expensive. On a loan amount of EUR 20,000, the insurance can easily cost EUR 2,000 or more. This amount is financed as part of the loan and increases each monthly instalment over the entire term. This is set against protection in the event of payment default, which is often restricted by clauses. In only 0.3 per cent of policies were the instalments actually covered in 2015. Many policies include waiting periods of several months before they even pay out. A careful review of the contract terms is therefore essential before considering the potential pitfalls in the event of a claim.
Analyse claims and exclusion clauses
In an emergency, the true value of insurance becomes clear. With payment protection insurance, there are often numerous hurdles. Many contracts exclude certain pre-existing conditions or only pay out in the event of unemployment after a waiting period of six months. A close look at the terms and conditions is essential.
Here are typical reasons for exclusion:
Dismissal during the probationary period.
Fixed-term employment contracts.
Self-inflicted unemployment.
Certain mental health conditions as the cause of incapacity for work.
Payment arrears lasting less than 60 days.
BaFin found in a study that contract wording is often difficult for consumers to understand. This complexity takes us directly to the legal rights and obligations you have as a consumer.
Know and use your rights as a consumer
Consumers have important rights. As a rule, you can cancel a payment protection insurance contract within 30 days. Frequently, the loan and the insurance are legally linked transactions, which means that cancelling one may also affect the other. An incorrect cancellation notice can even lead to an open-ended right of cancellation. From 1 January 2025, a new statutory rule will also apply. A seven-day waiting period between taking out the loan and taking out the insurance will then be mandatory. This rule is intended to reduce pressure at the point of sale. Given the many criticisms, it is worth considering more effective alternatives.
Consider sensible alternatives to expensive repayment protection insurance
There are often cheaper and more effective alternatives to securing a loan. Term life insurance protects your dependants in the event of your death and is usually much cheaper. An occupational disability insurance policy provides comprehensive cover if you are no longer able to work in your profession. These policies often offer better protection for less than half the cost of a typical residual debt insurance policy.
Check the following options:
Term life insurance: Protects the loan amount in the event of your death, often for less than ten euros a month.
Occupational disability insurance: Pays a monthly pension if you become unable to work, thereby protecting your entire income.
Private reserves: An emergency fund of three to six months' salary can bridge short-term shortfalls.
The right choice depends on your individual situation, which requires a well-informed basis for decision-making.
Making an informed decision: checklist
Before taking out payment protection insurance for a consumer credit agreement, you should proceed systematically. Careful review protects you from unnecessary expenses of several thousand euros. Use this checklist as a guide for your decision. Always compare the total cost of the loan with and without the insurance. In many cases, forgoing the policy and choosing an alternative is the financially wiser decision.
Is existing insurance cover already in place (e.g. disability insurance or term life insurance)?
What are the exact costs of the insurance over the entire term?
What waiting and deferred periods apply in the event of a claim?
What specific exclusion grounds are set out in the contract?
Was taking out the insurance made a condition for the credit?
These considerations help you make an informed and secure decision for your financial future.
More useful links
The Consumer Advice Centre offers an article criticising payment protection insurance as expensive and offering little in the way of benefits.
The vzbv (Federation of German Consumer Organisations) provides a press release calling for consumers to be protected against unwanted sign-ups to payment protection insurance.
The Federal Statistical Office (Destatis) provides information on datasets about loans and online transactions.
The German Bundesbank provides statistics on interest rates and yields for consumer loans to private households.
The Bavarian Consumer Advice Centre provides information in a press release about payment protection insurance, which is described as unnecessary and expensive, and about planned changes from 2025.
The Federal Statistical Office (Destatis) visualises statistics on the debt counselling atlas.
The FDP parliamentary group in the Bundestag has submitted a written parliamentary question on BaFin's market investigation regarding payment protection insurance.
FAQ
When does the payment protection insurance not pay out?
The insurance often does not pay out in the event of termination during the probationary period, for certain pre-existing conditions, or if contractually stipulated waiting periods have not yet expired. Check the exclusion clauses carefully.
Why is payment protection insurance so controversial?
Points of criticism include the high costs due to commissions, the lack of transparency and the many exclusions of benefits, which greatly limit the value for consumers.
What will change in 2025 regarding payment protection insurance?
From 1 January 2025, there must be a waiting period of seven days between the conclusion of the loan agreement and that of the payment protection insurance. This is intended to prevent pressure selling.
Are the costs of payment protection insurance taken into account in the effective interest rate?
No, as a rule, the costs are not included in the annual percentage rate. This makes the loan look cheaper at first glance than it actually is, and makes comparisons more difficult.
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