Put simply, PPI stands for Payment Protection Insurance. It is an insurance policy designed to protect repayments on loans and credit cards should you lose your job, or are unable to work for a certain period of time. It was often sold with or as part of a loan by banks and credit providers.
The point of PPI is to protect you, as the borrower, in the event that you are unable to meet the repayments of the respective loan. Depending on the exact details of the PPI policy, this will involve a number of areas. This includes loss of employment, medical illnesses and death, any event that can disrupt the borrower’s ability to repay the loan may be included under such a policy.
Unlike other insurance policies, PPI does not reward the borrower with money. Instead, the money is paid to the creditor and the policy exists to make payments on your behalf.
One of the problems with such policies is that they don't always match the length and terms of the original loan or meet the specific needs of the borrower. For example ,a PPI plan may only extend a year into a two year repayment plan and any problems which occur outside the insurance's dates cannot be claimed.
Likewise, medical history and other personal factors are not always taken into account with a PPI policy. It is for these reasons that UK courts found that many banks and other lenders were mis-selling PPI.