Buying insurance monthly can double what you’ll pay
Motorists can end up spending more than twice as much on their car insurance if they pay monthly rather than upfront – and most consumers are in the dark, experts have warned.
Car and motorbike cover can be expensive, so insurers offer policyholders the option of paying in instalments if they can’t afford to pay upfront or if this method better suits their lifestyle.
It typically costs more this way. The amount charged on top of the premium is indicated by the annual percentage rate (APR).
Insurers, brokers and premium finance companies – which lend consumers the money to buy the cover – can all have a part in setting the APR. But these firms can charge customers huge amounts for the privilege.
Telegraph Money understands that the highest APR on the market last month was 145pc, which was attached to a GoSkippy car insurance policy. This means a £500 policy would have ended up costing £1,225 – an extra £725 a year, considerably more than the cost of the policy itself – if paid in monthly instalments.
GoSkippy, a broker, is a brand of Eldon Insurance, which is owned by Arron Banks, the businessman and founder of the Leave.EU campaign.
An Eldon Insurance spokesman declined to comment.
Consumer Intelligence, the market research firm, said the average APR for car insurance was 30.9pc, meaning a £500 premium would cost £654.50 over the year to pay off monthly. The lowest car insurance APR currently on the market is 8pc, which would add £40 to a £500 policy paid for in instalments.
Around a quarter, or 27pc, of motorists pay for car insurance monthly.
Experts have warned that most drivers do not understand how APRs work, despite the Financial Conduct Authority (FCA), the City regulator, saying in 2015 that insurance firms needed to be clearer about the matter.
At the time, the FCA found that sellers of car and home insurance were not always transparent about the costs involved. The regulator added that some buyers did not even realise they would pay more to buy cover monthly.
A poll of 1,074 drivers carried out by Consumer Intelligence for Telegraph Money this week found that 82pc of respondents did not know the APR on their policy.
Martyn James of Resolver, an online complaints service, said: “The vast majority of people don’t understand how APRs work. There are lots of wonderful things about the insurance industry, but they don’t always cover themselves in glory when it comes to things like this.”
Ian Hughes, chief executive of Consumer Intelligence, said customers could avoid such high additional payments by taking out a credit card with a lower APR than an insurance firm would charge, then paying their premium upfront.
He said: “Following the ban on credit card surcharges in January, the smartest move for those who want to pay monthly is to pay in a lump sum on a credit card, and pay that off over time.”
The Association of British Insurers said customers should shop around to make sure they got the best deal. A spokesman said: “Paying by instalments helps customers spread their insurance costs by entering a credit agreement. Insurers follow the same strict rules as all firms offering other forms of lending.”
But Consumer Intelligence found that buyers who wanted to pay for insurance monthly were also the most likely to stay with the same insurer and not shop around.
Many insurers have been making an increasing amount of profit from customers paying monthly.
In the first half of this year, Admiral Group made £39.4m profit from this, up from £23.8m in the same period last year. An Admiral spokesman said: “We are committed to offering fair and transparent prices to all customers. We clearly communicate what the price will be should they choose to pay by instalments or as a one-off payment.”
Paying in instalments can drive up costs