Why paying car or home insurance monthly could cost you hundreds more
Paying for your insurance in instalments could cost you hundreds extra, says Paul Lewis.
An estimated 20 million of us pay our car or home insurance in monthly instalments. Comparison websites report that the average cost of car insurance is around £750 and home insurance is about £250, so it’s not surprising that many people are tempted when insurers offer a pay-monthly option. But they pay a high price for doing so. When you pay monthly, you are effectively taking out a high-interest loan to cover the cost of the annual premium. The consumer organisation Which? claimed recently that paying monthly can cost hundreds of pounds more than paying the premium in one lump sum.
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Perhaps encouraged by the Which? campaign, the Financial Conduct Authority (FCA) launched an investigation into the cost of paying for insurance monthly. In an update published this July, the FCA reported that the Annual Percentage Rate (APR) for insurance premium finance is typically between 20% and 30%, with almost one in five policyholders paying more than 30%. That’s a higher interest rate than most credit cards charge (though less than a typical overdraft, which ranges up to nearly 40% APR).
The FCA says these charges “materially exceed costs” for some providers, and is continuing its work to ensure that the way monthly payments are sold fulfils the rules that financial firms must follow. It has ruled out capping the charges, though, or forcing insurers to allow the premium to be paid monthly at no cost.
The FCA also found that the cost of paying monthly does not end with the interest charged. Some insurers charge monthly payers more for the annual premium than those who pay it in one amount. So if you can, it’s much better to pay the premium in full. Putting it on your credit card may be cheaper, but only if you resolutely pay down that debt every month.
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I f you have savings, the cheapest way of all is to pay the full amount from them and then to set up a standing order on your current account to repay the money into your savings account in equal instalments over the next 12 months. That way you cut out the lenders altogether.
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