Dozens of home and car insurers are charging customers up to 40% APR for those who pay for their policy monthly in a ‘tax for being poor’, according to a consumer champion.
Motorists faced the highest rates for paying monthly, with 1st Central charging up to 39.11%, the most of the 39 insurers in Which?’s investigation. The average rate for the 27 providers who disclosed their rates was 23.37%.
Only two car insurers did not charge any interest on monthly repayments for customers.
The interest on your car insurance bill can add up to hundreds of pounds throughout the year. For an 18-year-old driver, First Central’s Premier Online policy is priced at £3,388 if you pay upfront and has an interest rate of 36.32% APR to pay monthly. This added an extra £504, the consumer champion found.
In total, Which? asked 39 car insurers what APRs were being applied to monthly payments, and only two providers, NFU Mutual and Hiscox, said they did not charge monthly interest.
Monthly v annually paid premiums disparity grows
The disparity between monthly and upfront insurance premiums has steadily grown since 2018. Back then, the gap between monthly and annual costs was around £200, which grew to £250 in 2022 and then a further £300 at the beginning of the year.
This is despite a ruling from the Financial Conduct Authority (FCA) in January 2022 that required home and private motor insurers to give fair value to their products.
The reason for the higher rates is usually because the higher rates apply to younger drivers, but the consumer champion pointed out that non-payment for the policy leads to a cancellation of the policy.
So, with this in mind, Which? claims the insurers are not taking on a lot of risk when providing the insurance.
Home insurance has lower monthly rates
For home insurance, Co-op provided the most expensive rate, hitting customers who pay monthly between 31.31% and 34.75% APR. Across the sector, the average rate disclosed to the consumer champion was 23% APR.
However, almost half (44%) of home insurance providers did not charge interest, including major firms Bank of Scotland, Halifax, Lloyds, and Nationwide Building Society.
Of the 34 insurers questioned, seven refused to disclose their rates: AXA, Swiftcover, Bradford & Bingley, Dial Direct, Budget, Esure and Sheilas’ Wheels.
‘Tax on being poor’
Matt Brewis, the head of insurance at the FCA, has called the discrepancy “a tax on being poor. Those who are paying monthly are subsidising those who can afford to pay annually.”
Rocio Concha, Which? director of policy and advocacy, said: “Motorists need car insurance to be on the road legally, and the vast majority of mortgage lenders will insist on homeowners having cover – yet those who can’t afford to pay for their premiums all in one go are being penalised with eye-watering rates of interest.
Concha will be giving evidence in front of the Treasury Select Committee today, alongside Brewis, on the issue of insurance. The consumer champion director says it’s time for the FCA to “step up and get tough with firms that take advantage of customers who can least afford it”.
He added: “The regulator has been clear – paying for insurance monthly is a tax on being poor, and it’s shocking to see providers still trying to justify the practice. Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually.
The providers’ replies
Esure, First Alternative and Sheilas’ Wheels declined to comment.
First Central
We understand it is important to customers that we keep the price of insurance as low as possible – and benchmarking tells us that we are competitive for both annual premiums and for those who wish to pay monthly through a credit arrangement.
We offer a range of APRs from 5% to enable us to provide credit to as many customers wishing to pay monthly as possible, including those with low or poor credit scores. Over the past quarter, less than 2% of customers paid our highest APR.
Markerstudy
We recognise the importance of ensuring that premium finance arrangements provide fair value and deliver good customer outcomes. At Markerstudy Distribution, we perform regular assessments (at least annually) on the rates of credit we offer our customers. We are confident that we have the appropriate governance, oversight and controls in place to ensure our premium finance provides fair value and delivers appropriate customer outcomes.
Co-op Insurance
Co-op Insurance welcomes this survey analysis from Which?. We recognise the importance of premium finance as a product in the insurance industry, giving customers the option to spread the cost of their insurance over the course of a year.
Our insurance partner, Markerstudy Distribution, performs regular benchmarking on the rates of credit they offer to our customers. This benchmarking has led us to review these rates and we are looking to reduce them; we will update our customers on this as soon as we can.
AXA
We believe that using representative APR provides an inaccurate comparison of the interest rates insurance companies charge to customers for paying monthly. This is because firms calculate representative APR in different ways. Therefore, we have set out the average premium finance rates our customers are paying for both home and motor below. Their rate is clearly shown to customers when they choose a monthly insurance option with AXA.
Home – average premium finance rate: 7%. Motor – average premium finance rate: 10%.
As previously mentioned, this percentage varies depending on individual circumstances and a range of factors are taken into consideration. AXA is supportive of any measures that will lead to better customer outcomes and will continue to work with the ABI and FCA on industry reforms, including those that can help address concerns around affordable insurance premiums for customers.
