Pay-as-you-go car insurance

What is pay-as-you-go car insurance?

Pay-as-you-go car insurance can base the cost of your car insurance on how much you drive.

With pay-by-mile car insurance, a device fitted to your car tracks the number of miles you drive. Another type of pay-as-you-go car insurance is pay-per-hour insurance, which instead uses a tracking device to monitor how much time you spend driving.

How does pay-as-you-go car insurance work?

With pay-as-you-go car insurance policies like pay-by-mile, the less you use your car, the less you’ll pay for your car insurance. It means people who use their car less than average could benefit from taking out a pay-as-you-go car insurance policy. Insurers view lower use as reducing risk.

If you choose pay-by-mile car insurance, your premium will be based on how many miles you drive as well as a flat fee. A miles tracker fitted inside your car can add up your mileage and feed the data into an app. The fewer miles you drive, the less you’ll pay.

How much does pay-as-you-go car insurance cost?

How much pay-as-you-go car insurance costs will depend on how much you use the car.

Standard insurance premiums are also set according to your annual mileage. But with pay-by-mile car insurance, your mileage is even more important in setting your premium – it’s monitored by a device each time you drive.

Pay-by-mile car insurance tends to benefit people who drive much fewer miles than average as they’ll get a bigger reward for using their car less.

But part of your pay-by-mile car insurance premium will also be a flat fee based on the same factors used to calculate standard car insurance premiums. These include things like the type of car you drive, your driving history, age, occupation and address.

Why does mileage affect my car insurance premium?

Mileage is one way of measuring how much you use your car. Insurers generally view higher mileage as riskier because there’s a greater chance of you having an accident the more you drive. This is why insurers ask you to estimate your annual mileage when you get a quote for standard car insurance. The quote will be higher if you do a lot of miles.

Pay-per-mile car insurance is designed for drivers who do much fewer miles than the UK average of 7,000 miles per year. If you’re sure you’ll be doing significantly less than this, then pay-by-mile car insurance could cut your premiums as it means insurers will view you as less risky. For example, if you only drive about 2,000 miles per year.

Some pay-as-you-go car insurance companies only recommend pay-by-mile car insurance for people driving less than 3,500 miles per year.

What level of cover can I get with pay-as-you-go car insurance?

It depends as some insurers will only offer comprehensive cover on pay-as-you-go insurance. Others will let you choose from all 3 of the usual cover levels for car insurance:

Third party (TPO) gives you the legal minimum to get on the road, so only other people and their property or vehicles are covered in accidents where you’re at fault.

Third-party, fire and theft (TPFT) protects against damage to your car caused by fire or theft as well as giving you the cover you get with TPO.

Comprehensive car insurance is the highest level of cover, protecting your car against damage even for accidents where you're to blame. It also gives you everything you get with TPFT.

What isn’t covered by pay-as-you-go insurance?

As with all types of insurance, there’ll be things that aren’t covered, so you need to check your pay-as-you-go car insurance policy wording to understand the exclusions. Pay-by-mile car insurance policies are designed for people who do relatively few miles. You often need to select from a low mileage limit when you take out a pay-per-mile car insurance policy but it might be possible to increase the mileage limit a little if you need to.

Pay-by-mile car insurance can also come with age limits – some policies only target drivers aged 17-27. The cover level on pay-as-you-go car insurance can vary but many insurers only offer fully comprehensive cover on pay-by-mile policy types, giving you the highest level of car insurance cover available.

Who is best suited to pay-by-mile car insurance?

Pay-by-mile car insurance is best suited to people who drive fewer miles than average.

This could include:

• Students and young drivers who only use their cars for shopping, leisure or occasional trips

• Learners and newly-qualified drivers who don’t do many miles

• People who work from home

• Retired people who no longer use their cars for commuting.

If you use your car less than average, you could also consider pay-by-hour car insurance. Pay-per-hour could work out cheaper than pay-per-mile car insurance if you spend less time on the road than average – this could be because you live in the countryside and do a lot of motorway driving.

But if you live in an urban area and tend to get stuck in traffic from time to time, pay-by-mile car insurance is likely to be a better fit than a pay-per-hour policy.

What are the disadvantages of pay-by-mile car insurance?

Pay-by-mile car insurance won’t suit people who drive a lot of miles due to things like:

• Daily commuting

• Business travel

• Driving holidays.

With pay-by-mile car insurance, your premiums could increase if you suddenly need to drive more than expected. For example, if you change jobs and need to commute.

What are the alternatives to pay-as-you-go car insurance?

Pay-as-you-go car insurance policies like pay-per-mile and pay-per-hour are designed for people who use their car significantly less than average. If this isn’t the case, then you might be better off with standard car insurance.

But you could also consider a pay-how-you-drive black box insurance policy instead. This is quite different from pay-by-mile or pay-per-hour car insurance as it means the device will monitor your driving habits, including how you accelerate and brake. Black box car insurance can work out cheaper than standard car insurance if you can show you’re a good, safe driver.

Who are the best-known pay-by-the-mile car insurance companies?

Several companies now offer insurance priced by the mile. They can differ quite widely in the terms they offer and how their policies are priced. Here are some examples:

• By Miles – used in some of the examples above, was the first company in the UK to offer pay-by-the-mile car insurance. Launched in 2018, it offers cover to the over 25s using a two-pronged pricing strategy: a single, annual charge for the car, and monthly payments for the miles you drive

• Marmalade – also seen above, was founded in 2006 to provide telematics-based insurance for young people. Its pay-per-mile product is for named drivers in a parent’s car and priced for an initial 500 miles, with 100-mile top-ups available

• Insure the Box – offers different mileage packages and top-up miles. It will also add bonus miles for careful driving.