CONSUMERS have been urged to reclaim as much as £24,000 from their banks after the Competition Commission found last week that borrowers were being overcharged by £1.4 billion for loan cover.

The insurance, which is bought by one in four people and is supposed to cover your mortgage or loan repayments if you are unable to work, is described as one of the last big rip-offs in the industry after endowment mis-selling and overdraft charges.

Banks often add the cover to your loan automatically, with many borrowers never realising they have it. Even when they do, most consumers are unaware of the extent of overcharging.

Mortgage cover from Halifax, for example, would add £103 a month to the cost of a typical £200,000 home loan, or £2,472 over two years. The cheapest cover on the market can cost two-thirds less.

Martin Lewis, of Moneysavingexpert.com, the consumer revenge website, said: “This really is a scandal and I would urge anyone who has got a loan in the past six years to check whether they’ve been mis-sold a policy. This is set to be a bigger revolution than bank charges or credit card fees.

“In one case we have seen, a borrower paid £24,500 for cover on a £100,000 second-charge home loan over 18 months. They got the entire amount back plus interest.”

The commission said banks were selling cover to wealthier customers to subsidise cheap loans for lower-income borrowers who cannot get insurance. It said: “Unprotected customers at lower credit scores may be cross-subsidised by customers purchasing payment protection insurance (PPI).”

Peter Davis, deputy chairman of the commission, said: “We were surprised to find the problem with PPI so entrenched. People with incomes over £50,000 were just as vulnerable as low-income earners.”

Jerry Mumford, of Loxwood, West Sussex, is among them. The 34-year-old, an IT sales director for an American firm, was sold protection from HSBC when he applied for a £25,000 equity-release loan. He has since been refunded £1,186 by the bank.

Mumford said: “I had the impression it was part of the process of taking out a loan. At no point was I ever asked if I had any cover through work. I tried to ask for someone to rationalise our insurance costs. It was almost impossible. We used a very easy template letter and sent off my complaint - they didn’t even try and argue.”

Nasim Kanji, 58, a lecturer from Oxhey, Hertfordshire, did not realise she had been charged £9,000 for insurance for a £62,000 loan secured on her home until she went to Chase de Vere Mortgage Management, a broker, to remortgage. She said: “There is no way I would have taken out such insurance because I have assets that would cover my payments were anything to happen which stopped me working.”

Simon Tyler at Chase de Vere said: “This was terrible advice and there is no way such a policy was suitable.”

With 14m policies sold alongside mortgages, loans and credit cards, consumer groups said the revolt by policyholders could be bigger than that over bank charges.

Consumers can claim if they were mis-sold the policy - normally because they would never have been eligible to claim, perhaps because they were self-employed or had a pre-existing medical condition.

Lenders use a variety of tricks to sell PPI. Moneyback Bank, for example, offers £200 cashback if you take out its policy.

The commission report said: “Some consumers were under the impression that their credit application was more likely to be accepted if they bought PPI.”

Even if you were not mis-sold, cancelling your policy and switching to a cheaper one if necessary could save thousands. If you took out a £7,500 loan with NatWest over five years, for example, your repayments without insurance would be £161 a month or £9,652 over the term. With insurance, however, repayments would balloon by nearly a third to £208 or £12,458 over the term - an extra £2,806. However, stand-alone provider Paymentcare offers the same cover for just £465.

The commission’s recommendation that banks be prohibited from selling insurance at the “point-of-sale” has sparked fears of another hike in interest rates on loans, which have already soared since the credit crunch.

A banking industry source said: “The natural consequence of the measures being proposed is that rates will rise.” A spokeswoman for the British Bankers’ Association said: “We accept that PPI isn’t going to be for everyone, but there is merit in the product. If you do decide to buy PPI, shop around and be certain to read the fine print.”

HOW TO CLAIM

How do I know I’ve got PPI? If you have a protection policy with a credit card you should be able to see any payments on your statements. If, however, you have a personal loan it might not be so obvious. Contact your lender to make sure.

Can I make a mis-selling claim? You can claim compensation if you’ve been sold PPI but would be unable to make a claim - perhaps because you are self-employed or have a medical condition. You may also be able to argue your case if the insurance was automatically added to your policy, you were told it was compulsory or if you already had alternative cover.

Where do I take my complaint? In most cases the firm that set up the credit arrangement will be responsible for the sale of the insurance policy.

If you are unsure, ask your lender or the finance company that set up the credit agreement.