Annual vs. monthly car insurance explained

Financial regulator tells insurers to help customer hit by pandemic

If you are struggling to pay your car insurance premiums during the Covid-19 pandemic, the UK’s financial regulator, the FCA, has instructed your insurer to help you. You should contact your insurer and explain your situation. They have to decide how best to help you based on your circumstances.

The latest FCA proposals (November 2020) mean that:

The FCA says borrowers – that’s you if you paying for car insurance by instalments – would have until 31 January 2021 to request an initial payment deferral. And the regulator says: “A payment deferral under our proposals would not be reported as missed payments on a borrower’s credit file.”

Keep paying if you can afford to do so

Sheldon Mills, interim executive director of strategy and competition at the FCA said: “We know that many consumer credit borrowers are vulnerable. That’s why tailored support reflecting borrowers’ individual circumstances will still be offered and remains the most appropriate option for many. We are also proposing to extend payment deferrals for some consumer credit products to offer additional support.”  

But Mills warned: “It is in borrowers’ own long-term interest only to take a payment deferral when absolutely necessary. Those that are able to keep paying, should do so.”

A history of Financial Conduct Authority help

November 2020 saw the fourth intervention from the Financial Conduct Authority (FCA) telling insurers to help customers struggling with their car insurance payments. It follows announcements in May, August and October.

Insurers need to offer payment holidays – the FCA called them payment deferrals – if you are struggling to pay. The FCA also told insurers to reassess drivers’ risks, remove and refund any unnecessary or expensive add-ons, and even to downgrade policies from comprehensive to third party fire and theft (TPFT) if that were cheaper and appropriate.

The August guidance from the FCA was due to expire on 31 October 2020 but the FCA said on 16 October that insurers must continue to offer ‘tailored’ support to customers facing payment difficulties. This must include those newly facing problems, perhaps because of job losses or only working part-time. 

The FCA made clear this advice no longer had a final end date. “Guidance should remain in force during the circumstances created by coronavirus until varied or revoked,” it said.

If you are struggling to pay – get in touch with your insurer at once.

What is annual car insurance? 

The standard payment option offered by all insurers is to pay for your car insurance upfront for the full year, in one single payment. This gives you access to deals from more insurers, as some only offer annual payment plans. You’re also likely to find a cheaper price by paying upfront.

But many drivers find it difficult to pay the full amount upfront – this is especially the case for young and inexperienced drivers, as their premiums can often cost thousands. Spreading payments over ten or more months can be attractive. 

It is estimated that about 40% of customers spread the costs of their car insurance premiums over the year using ‘premium finance’. Premium finance is like a loan – the insurer gets its money and you get to pay back the loan over the year.

Can you pay for your car insurance monthly?

If you can’t afford to pay upfront for the full year’s insurance on your car, don’t worry. Many insurers offer the option to pay for your cover in monthly instalments. Spreading the cost of your insurance over the year can make it more manageable as you won’t have to find such a large lump sum at the start of your policy – though you will need to pay a deposit.

The big drawback, however, is you’re likely to pay more if you choose to pay monthly. Most insurers will add an extra fee for monthly payments as well as charging interest. You are effectively taking out a loan.

Why can’t I pay for monthly for car insurance? 

Not all insurers will offer the option to pay for your car insurance in monthly instalments, but even if they do you may not be able to pay this way.

As you’re effectively taking out a loan for the sum of your insurance and paying it back over the year, most insurers will perform a credit check if you choose to pay monthly. 

If you have a poor credit score or you’ve struggled to repay credit in the past, you may not be given the option to pay monthly. And if you are, some insurers will use your credit information to set the APR (annual percentage rate) for your payments and you may be charged more.

What’s the price difference between paying monthly and annually?

You might think paying monthly is a case of splitting your annual cost into 12 monthly payments, but unfortunately it’s not so simple — you’ll usually be asked to pay an upfront deposit of around 20% of your annual cost, then the rest of your payments will be spread over 10 or 11 months.

You’ll usually have to pay interest on top too. Depending on your insurance premium and credit history, choosing to pay monthly can add up to an extra 20% on the cost of your insurance over the year.

Often the insurer contracts this out to a ‘premium finance’ firm. They make money by lending you the money for the premium and charging you handsomely for it. The UK Regulator, the Financial Conduct Authority (FCA), has regularly raised concerns about this element of the insurance industry.

What should I do if I can’t afford to pay annually?

You will usually get the best deals on your car insurance if you can afford to pay upfront for the whole year. But if you’re on a tight budget, that’s not always possible. 

If you do need to pay for your insurance monthly, use a price comparison website like Uswitch to shop around for the best deal, as some insurers can offer great prices on policies with monthly instalments.

If possible, try to put away a little money each month for next year’s policy. That way you can pay upfront and avoid any interest charges. Alternatively, consider using a 0% purchase credit card which will allow you to spread the cost over several months interest-free. Just remember that once the 0% deal ends, interest will kick in.

Compare quotes now and see prices for annual and monthly payments side by side.

What is pay monthly insurance? 

A handful insurers, such as Cuvva and LV=, are starting to offer pay monthly car insurance policies that work differently to traditional policies. Instead of working like a loan, these policies are more like a subscription that allows you to make a payment each month, and cover continues until you cancel. 

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