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Annual vs. monthly car insurance explained

Paying for your car insurance in monthly instalments can spread the cost but is it the best option? Read on to find out.
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Monthly and Annual Car Insurance - Which is Cheaper?

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When you buy car insurance, which is a legal requirement for drivers on UK roads, you’ll be given the choice of paying for your cover in monthly instalments or annually. For some people, the choice may be obvious, but it’s important to understand how both options work.

Should I pay monthly or annually for car insurance? 

The most common payment option offered by all insurers is to pay for your car insurance upfront for the full year. This approach is usually cheaper.

But many drivers cannot find the money to pay the full amount upfront. For this reason, spreading payments over ten or more months can be an attractive alternative. This is called premium finance and effectively means you borrow the money to pay the premium and then repay it with interest over the rest of the year.

Is it cheaper to pay monthly or annually for car insurance?

It’s cheaper to pay for car insurance annually, because there is one upfront payment, with no added extras. 

Paying monthly is not a case of splitting your annual cost into 12 monthly payments. When you pay upfront, insurers get paid in full for their policy, and that’s the end of the matter. 

When you pay in instalments, someone is shouldering the cost of the policy and letting you pay bit by bit. They’re loaning you the money for the policy, so it’s reasonable to charge you for this service, which they do in the form of interest charges. 

Depending on your insurance premium and credit history, choosing to pay monthly can add up to an extra 20% onto 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.

There are rare cases where there’s no additional cost for splitting the cover – so check first to see the terms and conditions. 

Comprehensive car insurance
Comprehensive car insurance

The pros and cons for each?

Paying for car cover annually is the most popular and common way to purchase car insurance, but what are the advantages and disadvantages:

Pros of paying annually:

  • It’s cheaper as all you are paying is the cost of the premium

  • It makes money management easier, as once you have this cost out of the way, you don’t have to think about it for months and you have a whole year to save for the next payment

  • It provides peace of mind, as once you’ve paid you know you’re covered even if you have an unexpected outlay that strains your finances

Cons of paying annually:

  • According to the Association of British Insurers, average annual premiums were around £419 at the end of June 2022, making this a sizable sum to find if your budget’s tight.

  • Costs are even higher for young or inexperienced drivers, which could prompt some to risk the criminal offence of driving without insurance, or downgrade their cover.

Pros of paying monthly:

  • Easier to manage, as payments are spread out over the year

  • Possibly the only means of affording car insurance, particularly for young drivers

Cons of paying monthly:

  • Even more expensive that annual payments

  • The deposit could still present difficulties for drivers required to pay high premiums

  • Little leeway if circumstances change, such as losing a job, as the policyholder would need to ensure monthly payments continue 

Do I have to pay a deposit to take out car insurance?

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.

Does paying for car insurance monthly build credit score?

Making regular credit payments, such as paying car insurance in instalments, can help your score, as it shows you to be responsible when it comes to financial commitments.

However, late or no payments will be reported to the credit agencies and will damage your credit score. 

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

If you need to pay for your insurance monthly because finding the money to pay upfront is just not feasible, shop around for the best deals, as some insurers can offer great prices on policies with monthly instalments.

If possible, try putting a little money away each month for next year’s policy. That way you can pay upfront and avoid the additional costs that come with paying in instalments.

Alternatively, consider using a 0% purchase credit card, which would allow you to spread the cost over several months interest-free. If this sounds like an attractive option (it is) remember the following:

  • How much credit you’ll get on your card will depend on your credit history

  • You may struggle to get a 0% credit card if you owe money on other cards or have a poor credit rating

  • You should apply for the card at least a month in advance to ensure everything is in place for when you start shopping around for car insurance

The 0% interest period on these types of cards will run out, at which point interest will kick in. Look for cards that offer more than 12 months, such as 18-month or 24-month periods, so you have some breathing space to ensure you clear off what you owe.

Why can’t I pay monthly for my chosen 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 is pay monthly insurance? 

A handful of 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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