Insurers charging ‘eye-watering interest’ to those paying monthly
People who can’t afford to pay annually for their insurance are being penalised with ‘eye-watering’ interest charges on their monthly payments, it has been claimed.
Research by Which? has found a significant number of those who pay monthly face annual percentage rates of 30% or more.
In March, the consumer group asked 39 car insurance companies and 34 home insurance providers about the interest rates they charge those paying monthly.
Biggest charges
Car insurer 1st Central charges interest of up to 39.11% on monthly premiums, while Co-op Insurance charges up to 34.75% on both its car and home cover monthly premiums.
A number of insurers refused to disclose what they charge, including AXA, Sheila’s Wheels and Swiftcover.
No charges
At the opposite end of the spectrum, NFU Mutual and Hiscox don’t charge extra for those paying monthly.
Premium finance
If you pay for insurance in instalments, your provider is basically lending you the annual premium and asking you to pay it back monthly. This is known as premium finance.
Unfair
Premium finance has been criticised as unfair. Which? points out that while credit card providers face the risk of never seeing their money again if customers default, this isn’t the case with insurers. It explains if you miss a monthly insurance payment, the insurer can cancel the policy usually with just a week’s notice. Although insurers face some financial loss in this situation, particularly if you’ve made a claim, the risks are lower than those faced by credit card companies.
A ‘tax on being poor’
Meanwhile, head of insurance with the Financial Conduct Authority Matt Brewis, labelled premium finance as a ‘tax on being poor’.
He said:
‘Those who are paying monthly are subsidising those who can afford to pay annually.’
How to keep your insurance costs down
Whether you pay monthly or annually, there are things you can do to keep your insurance costs down.
Don’t auto-renew, shop around
In 2022, rules were introduced to stop insurers offering their best deals to new customers and increasing renewal prices for existing customers each year with no justification. But this doesn’t mean you can’t beat your renewal quote by checking out deals from other insurers.
Also, companies can still charge different prices through different channels. So, for example, they may offer better deals on a certain price comparison site – they’re allowed to do this as long as the same offer is available to existing customers who came through that site.
Haggle
Some insurers are open to negotiation if you’re not happy with your renewal quote. Just make sure you do your research before speaking to them so you can tell them what other deals you could get.
Interest-free credit card
If you can’t afford to pay for your insurance in one annual payment, you may be able to save money by using an interest-free credit card to cover the full cost rather than shelling out monthly. Just be absolutely sure you’ll be able to pay it off before interest charges kick in.
Get quotes three-four weeks ahead
You’ll get the cheapest car insurance quotes 23 days ahead of your renewal date and the cheapest home insurance quotes 21 days ahead of your renewal date, according to Money Saving Expert. The later you leave it after this, the more expensive your quotes will get.
Black-box insurance
Telematics car insurance – or black-box cover – tracks your driving. The safer your driving, the cheaper your insurance.
Add another driver
The addition of a lower-risk driver (maybe someone older, with a long no-claims history) can bring down the cost of your car insurance.
Rebecca Routledge
A qualified journalist for over 15 years with a background in financial services. Rebecca is Money Wellness’s consumer champion, helping you improve your financial wellbeing by providing information on everything from income maximisation to budgeting and saving tips.
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