Hidden costs of direct debit insurers don’t tell you about
CUSTOMERS who pay for car or home insurance in monthly instalments are not being warned it will cost them more, a City watchdog said. A damning report found some insurers were charging up to 75 per cent extra on top of annual premiums if people paid by direct debit instead of a single upfront sum.
But the Financial Conduct Authority said customers were not being told about the hidden costs.
Its study found people did not realise that ‘there is an additional cost associated with paying by instalments, or the amount of this additional cost’.
This is partly because firms are failing to display the charges when customers buy insurance online, the report said.
The FCA examined 43 websites of insurers and price comparison firms.
It found that 19 of these – almost half – did not explain the extra charges for monthly payments during the initial stages of the purchase.
In some cases, people were not warned until they entered their payment details. And on four websites, the additional charges were not displayed at all.
The report said that for some sites, ‘it was possible to proceed through the entire purchase prior to entering payment details without it ever being explicitly stated that paying by instalment carried an additional cost’.
Experts welcomed the investigation, and warned that customers who pay monthly are in effect taking on a loan because of the extra amounts they are charged.
Rebecca Rutt, from MoneySavingExpert.com, said: ‘Paying monthly for car or home insurance means you’re effectively choosing a high-interest loan.
‘Along with paying for the insurance, you’re also paying for the interest added on by the insurer.
‘If you can, always pay it in full to avoid this. If you can’t afford
‘Effectively choosing a loan’
such a big lump sum in one go, a credit card which charges 0 per cent for a minimum of 12 months will cut your costs.’
Some of the insurance firms are believed to be in breach of 2010 disclosure of information regulations and could potentially face large fines.
Linda Woodall, of the FCA, said: ‘Consumers should expect clear information about the payment options available to them.
‘Regardless of whether people choose to pay upfront or in instalments, it’s important that they can see exactly what they are signing up for and how much it costs, so they can decide whether they are getting a fair deal.’
The watchdog warned that if insurers do not start to make the full cost of policies clearer to customers, it will consider ‘further regulatory intervention’.
A spokesman for the Association of British Insurers said: ‘Insurers want to ensure that any premium finance options are clearly and fully set out as part of the sales process, so that customers know exactly how much they have to pay for their insurance.
‘Our members will be carefully considering the findings of this FCA review to ensure that all motor and household insurance customers understand the cost of the different premium payment options.’