Save hundreds every year by paying up front

PEOPLE who pay for essential cover such as motor and home insurance by monthly direct debit are throwing away hundreds of pounds a year as a result.

Those who pay monthly for these types of cover are far less likely to switch at renewal and consequently end up paying well over the odds. Most insurers also slap on additional charges for those who pay by direct debit, which drives up the overall cost.

It is worth checking if you can afford to pay your premium in one go, as you could bag a major saving. VICIOUS Millions are caught in a “vicious circle of monthly insurance payments” by paying by direct debit, according to new research from GoCompare Insurance.

Monthly payers are far less likely to switch than annual payers and then lose out as insurers routinely charge long-standing customers more, while saving their best rates to attract new business.

People who pay for their insurance monthly rather than annually are up to a third less likely to switch insurer on their annual renewal date, simply letting their contract run, often for many years.

As a result, they are paying £144 more for their motor insurance on average and £113 more for household cover.

The research found 38 per cent of drivers pay for car insurance by monthly instalments, rising to 44 per cent for home insurance.

This suggests that around 7.6 million car insurance and 11.5 million home insurance policies are paid for with monthly premiums. EXTRA CHARGES Worryingly, lower income households are far more likely to spread the financial burden by paying their premiums monthly, even though they pay a lot more by doing so.

GoCompare head of consumer affairs Georgie Frost said when you pay monthly you are entering into a credit agreement with your company and may rack up instalment fees and interest charges.

“You are not really paying for your insurance but paying back a loan that comes with a hefty APR on top,” Frost said.

This traps monthly payers in a vicious circle as they pay more in fees and credit and are more likely to stick with what is a bad deal.

A standard car insurance premium costing £498 when paid annually rises to £597 when paid monthly. Frost said: “That’s an additional £99 a year, or an extra 20 per cent.” RATE SHOCK Dr Joe Gladstone, academic researcher in consumer behaviour at University College London, said the main reason people do not switch insurance is that they see it as too much hassle: “Cancelling a direct debit and setting up a new payment adds another layer of hassle.”

Those who pay a smaller amount monthly also fail to realise how the cost adds up and worry less about price than those who pay the full amount in one go, he added.

Some insurers charge APRs of almost 30 per cent for monthly payers, although a handful charge nothing at all.

For example, Tesco Bank charges a whopping APR of 29.9 per cent. A spokesperson for Esure, which charges 27.8 per cent, said it increases the cost by 11.6 per cent.

Hannah Maundrell, editor-inchief of Money.co.uk, said there is an option if you are struggling to pay up front, but do not want to be stung by extra costs: “You could take out a credit card charging zero per cent for an introductory period and pay that way. You can pay it off over 12 months, but without incurring any added interest.”

When your insurance comes up for renewal, check how much it costs to pay either monthly or annually; some comparison sites offer this service.

If you needed to pay monthly when you took out your policy but can now afford to pay in one go, then consider switching to an annual deal.