Car insurers charge APRs up to 39% for monthly payments
Research from Cuvva, which sells ‘flexible’ car insurance, has accused the car insurance industry of being ‘opaque’ and ‘not fit for purpose’. It says drivers are disadvantaged by lack of APR education and transparency, and that large insurers are profiting from younger and less well-off consumers.
Cuvva says that drivers renewing their car insurance, and choosing to pay monthly will likely suffer financially from insurance providers’ lack of clarity.
It says that compared to annual car insurance, it is often not made clear to consumers that they are paying a costly premium for the flexibility of monthly car insurance repayments.
The Ford Fiesta is Britain’s most widely sold car in 2019 and the current top-selling vehicle in 2020.
Out of the insurance companies surveyed by Cuvva, it had an average annual insurance premium of £3,975.19 for a 19-year-old male driver. However, costs rose as high as £4,431.50 on average if payments were spread across 12 months.
In some cases, the APRs on car insurance were significantly higher than paying the same monthly instalments through a credit card.
A survey by Cuvva found that almost a third of respondents pay for their car insurance monthly, with over half of these drivers admitting that they paid for their insurance monthly because they cannot afford to pay for it in one lump sum.
This is especially true amongst younger drivers, with some paying an extra of £456 on average per year. But monthly car insurance that has an APR attached to it remains costly for drivers across all demographics.
Which? recently reported that insurers charge an average interest rate of 25% APR to customers who pay monthly. This average APR is higher than nine of the UK’s leading banks, offering mid-level balance transfer credit cards.
Freddy Macnamara, CEO at Cuvva, said: “There remains a widespread lack of understanding of financial services and insurance products amongst younger UK consumers, especially when it comes to repayment plans linked to car insurance. This education gap is not only being inadequately addressed but many providers continue to benefit from the lack of transparency towards its customers.
“This is something that must be curbed, and new, more progressive players in the market can play a large part in shaping this. As consumers naturally look for savings and flexibility in 2021, the industry must adapt.”
The cost of paying for car insurance monthly
APRs are the total cost of borrowing money over the course of a year. For many, paying monthly for their car insurance may seem like a good way to spread the cost, but in many cases, this can prove to be hundreds of pounds more expensive.
Cuvva looked at some of the UK’s best-known car insurance companies, including Direct Line, Aviva, LV, Churchill and Endsleigh.
It gathered premiums for a male 19-year-old student living at home in Romford, Essex, purchasing a 5 door 2019 Ford Fiesta, and who has been driving for one year.
Endsleigh had the highest price difference between annual and monthly payments at £735 (£4,398.63 vs £5,132.91), as well as the highest APR at 39%.
This is much higher than the average 21% APR for balance transfer credit cards from the top nine UK banks.
Macnamara said: “The less well-off and younger members of society are more likely to pay for their annual car insurance on a monthly basis, thus paying substantially more than they have to. The car insurance industry remains outdated and unequipped to meet the needs of the UK’s future generations of consumers.
“Providers need to adapt, innovate and update, and take seriously the duty they have to provide a service that is transparent, accessible and flexible – especially in these challenging times.
“The industry needs to provide greater transparency around APRs. Introducing an APR threshold will close the wide interest range we’re seeing in the sector, and protect motorists from astronomically high fees hidden in insurance quotes.”