Drivers could be paying up to 15% more when choosing to pay for their car insurance by monthly instalments instead of in one annual payment, according to research by uSwitch.
While it may seem more economical to spread the cost of cover, drivers are urged to consider the extra cost of the policy over the year.
When calculating the cost of monthly premiums, insurers don’t simply split the cost of a year’s cover into 12 equal instalments. Drivers are charged a deposit and a number of monthly payments as well as interest, as the cost of cover is effectively treated as a loan over the year.
The amount of interest you pay will depend on the price of cover as well as the APR (annual percentage rate) charged by your insurer. Our research found that popular insurers charged APR ranging from 21.9% to 32.5%. This increased the cost of the policy over the year by up to 14.9%, and could mean drivers pay hundreds more for the same cover.
The amount of interest charged can vary from consumer to consumer, depending on their financial circumstances, the size of the deposit paid, and number of payments to be made over the year. Many insurers will run a credit check when you ask for quotes to pay monthly, to determine what APR they should charge.
Fewer insurers offer monthly payments, so you could also be limiting your options when shopping around and could miss out on the best deals.
Younger drivers are often hit hardest by monthly payment increases as their premiums are typically higher, making the interest payment more substantial.
How you can avoid the extra charges
The simplest way to avoid the charges for monthly payments is to opt for an annual payment and pay for the whole policy upfront if you are able to.
But if you can’t afford to pay for a year’s cover upfront, this is not the only option. You could also shop around for a personal loan with a lower APR, or purchase your insurance cover on a low or 0% credit card (but check whether your insurer will charge a credit card fee first).
You can also shop around to try to cut the cost of your insurance, whether you choose to pay upfront or over the year. uSwitch makes it easy to compare the cost of annual and monthly payments so you can decide what the best option is for you.
Rod Jones, insurance expert at uSwitch.com, says: “With the cost of insurance increasing year on year, it’s understandable that many drivers will look to spread their payments over a number of months. It pays to check the details though, as drivers could find themselves paying more over the year as a result and hitting their wallet even further.
“Motorists should make sure to check the fine print, whenever you are looking to take out an insurance policy, to see if there is an added cost for paying monthly. Although sometimes a deal may look cheaper upfront, you may end up paying considerably more as a result of the interest charged.”