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Drivers face £300 surcharge when paying car insurance monthly

Drivers face £300 surcharge when paying car insurance monthly
Paloma Kubiak
Written By:
Paloma Kubiak

The gap between what drivers pay for car insurance monthly and annually has grown to over £300, leading to a consumer champion’s calls for the regulator to tackle the issue.

In September 2023, drivers opting to pay for their car insurance monthly over the course of a year forked out £892 on average. Meanwhile, those who paid upfront for the year paid £583 – a £309 gap.

The sales data from comparison site GoCompare by Which? revealed that in December 2018, the gap stood at a lower £207. At this time, drivers paid £460 annually vs £667 monthly.

It then grew to £251 in September 2022.

Campaign group Which? said this could be attributed in part to younger drivers who typically pay the highest premiums and are also more likely to pay monthly as they’re also less likely to be financially resilient.

But doing so can ramp up costs as interest rates of 30% can be common, it said. Based on three driver profiles provided for quotes, Which? found that the 18-year-old faced the highest premiums and largest range of APRs (from 20.50% to 36.33%) compared to 20.90%-30.12% for the 39-year-old.

The average extra cost for paying monthly for the 18-year-old was £459, but £41 for the 59-year-old and £82 for the 39-year-old.

A third pay car insurance monthly

Meanwhile, research from industry regulator the Financial Conduct Authority (FCA) revealed that a third of insurance customers paid monthly in 2022. However, more than half of drivers with low financial resilience paid for their motor insurance through monthly instalments.

Indeed, it’s five years since the FCA found that motor insurance firms were earning as much as £110 per policy, on average, from providing premium financing – the interest added to the original insurance quote for those paying monthly.

Since then the FCA has warned the insurance industry that the interest rates some firms are charging customers paying monthly may be “excessively high”, with the FCA’s head of insurance, Matt Brewis, recently labelling premium finance as a ‘poverty premium’.

The FCA also suggested some firms may be breaching its rules because the interest rates charged do not take into account that insurance policies can be cancelled if people don’t keep up with monthly payments.

Insurance firms have been required by the FCA since January 2022 to ensure their products provide fair value, with the introduction of Consumer Duty last year strengthening protections.

But Which? is calling on the FCA to set out an action plan for how it’s going to force insurance firms to offer value for money.

It wants to see the FCA commit to publishing an analysis every six months of insurance firms’ interest rates, with league tables naming and shaming those with the highest rates. Further, it wants it to assess how much it costs firms to provide premium credit and take action against any firms charging monthly customers excessive interest rates by June 2024.

Rocio Concha, Which? director of policy and advocacy, said: “Car insurance is a legal requirement for motorists – and yet those who can’t afford to pay in one go annually are often being penalised through unjustifiably high interest rates on their monthly repayments.

“That isn’t right – and it’s now up to the financial regulator to outline an action plan to tackle the unfair costs of paying monthly for insurance.

“The FCA must monitor the issue closely, publishing an analysis every six months of firms’ rates, naming and shaming the worst providers. The regulator should also assess how much it costs firms to provide premium credit and shouldn’t hesitate to take action against providers charging monthly customers excessive interest rates.”

Related: Annual car insurance cost speeds up to nearly £1,000