Warning for drivers as common tactic to avoid big insurance bill could actually cost £300 MORE
DRIVERS have been warned that a common tactic for avoiding a large car insurance bill could actually be costing as much as £300 a year MORE.
Customers who buy cover monthly can end up paying hundreds of pounds more than those who pay for policies annually, according to research from Which?.
The average annual cost for those paying in monthly instalments was £892 while the cost of paying a one-off annual fee was £583 - a difference of £309.
That's based on data from comparison site Go Compare, and analysis of annual and monthly customers between December 2018 and September 2023.
A spokesperson for Go Compare said its data showed 45% of people paid for their car insurance monthly in November 2023.
Which? also found the price gap between the two different payment methods is increasing.
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In December 2018, the gap was £207 - £460 for paying annually versus £667 for paying monthly.
Meanwhile, in September 2022, the average gap was £251 - £738 for monthly payments versus £487 for paying annually - a £44 difference.
Which? said the difference in costs between those paying monthly and annually could be explained by the fact younger drivers, who usually pay more for insurance anyway, are more likely to pay monthly.
However, it also highlighted how paying for car insurance monthly can see interest rates of more than 30% slapped on top.
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Insurers charge interest for customers paying monthly because in effect they are agreeing to loan you the full cost of the insurance.
It comes as Which? calls on the Financial Conduct Authority (FCA) to set out an action plan to ensure insurance firms offer value for money.
Rocio Concha, director of policy and advocacy, said: “Car insurance is a legal requirement for motorists – and yet those who can’t afford to pay in one go annually are often being penalised through unjustifiably high interest rates on their monthly repayments.
"That isn’t right – and it’s now up to the financial regulator to outline an action plan to tackle the unfair costs of paying monthly for insurance."
Which? is calling on the FCA to publish analysis of insurance firms' interest rates every six months, with league tables naming and shaming those with the highest rates.
Meanwhile, it wants the FCA to assess how much it costs firms to provide premium financing - where customers pay for their insurance monthly.
And it wants the FCA to take action against any firms that are charging monthly excessive rates, starting from June 2024.
It comes after the regulator found five years ago motor insurance firms were earning as much as £110 per policy, on average, from premium financing.
Since then it has warned the insurance industry that interest rates some firms are charging customers paying monthly may be excessively high.
A spokesperson for the Association of British Insurers (ABI), which represents industry, said insurers were facing "significant" cost pressures out of their control.
They added it was continuing talks with the FCA and insurers to look at reviewing premium finance practices in the sector.
Meanwhile, a FCA spokesperson added: "We have already told firms they must ensure their products provide fair value, including for customers paying monthly.
"Where we see products that don’t offer fair value to consumers, we will take action.
"We also expect firms to continue to support customers in financial difficulty and reflect on whether they can do more to support people with lower financial resilience, in line with our guidance."
How else to cut costs on car insurance
Opting to pay for your car insurance in one yearly lump sum, if you have the cash, is just one way to save money on the bill.
Adding a named driver to your policy can slash bills by hundreds of pounds too.
Meanwhile, renewing your car insurance at the right time could save you £200.
Ryan Fulthorpe, car insurance expert at Go Compare, said locking in a premium 29 days before your new policy is set to start will save you the most.
You have to act fast as well - the closer you get to the renewal date, the more money you're likely to spend.
Plus, if you're someone who doesn't drive that much, a pay-per-mile policy could save you money.
These types of premiums charge you based on the miles you actually drive, rather than a flat monthly or yearly fee.
Or try working with a car insurance broker who will be able to help you find the cheapest policy.
Bear in mind though, they'll charge you a commission which means you could actually end up paying more.
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You can get help finding a specialist broker via the British Insurance Brokers' Association.
The Sun approached the FCA and Go Compare for comment.
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