Paying monthly for car insurance is costing UK drivers an estimated £544m a year in interest, according to a new study from GoCompare Car Insurance.
The comparison site looked at the actual amount added to insurance premiums when customers opt to pay in monthly instalments, rather than in one go. Paying monthly adds £55.36 to the average motor insurance policy, but the study also revealed the huge range of additional costs applied by different insurers.
While some insurers add as little as 6.8% for monthly premiums, others add over 17% to the total cost. As a result, for those with higher than average premiums, the cost of paying monthly can really add up. For example, the average comprehensive car insurance premium for a 17-24-year-old driver is £1,453.31. For them, choosing the wrong insurer could add £257 to the total cost, if paying monthly.
Almost a third (31%) of drivers currently pay monthly for their car insurance and previous studies have shown that people who pay for their insurance monthly rather than annually are up to 33% less likely to switch provider. Monthly payers are also much more likely to need to save money on their outgoings. Almost half (47%) of drivers from lower-income households pay monthly for their car insurance, compared to just 29% of those from the highest earners.
Lee Griffin, CEO and one of the original founders of GoCompare, commented: “Car insurance is always cheaper when you pay one annual payment, but drivers who can’t afford to do that are hit by additional costs. The added danger here is that people paying monthly are statistically more likely to renew again with the same insurer, without checking the total cost. It can become a cycle of paying more, for people who can least afford to do that.
“We know that hassle is a big factor behind why people don’t switch. People paying monthly may see having to cancel a direct debit and set up a new payment as an additional hassle. Equally, if you pay a smaller amount monthly, you are likely to be less price-sensitive than if you were to pay the full amount in one go.
“At the very least, you need to check what your insurer is charging for monthly payments and if you are with an insurer that charges 17% extra for monthly payments, it is going to be well worth shopping around for a better deal.”
Mark Andrews, Director at Altus Consulting commented;
It’s an interesting stance for GoCompare to take given that they (and other PCWs) don’t explicitly state APR charges on their quote response pages. Arguably these hidden extras which have left a bad taste in consumers mouths, have had to be introduced by insurers as a result of PCWs focus on selling “cheap” insurance.
Consumers don’t look at small print and are disappointed and surprised to see APRs, servicing admin fees and charges, high excesses and renewal price hikes when they come to use the product. Often consumers also find the insurance product doesn’t cover them for the full set of risks that they thought they were covered for when they selected the cheapest premium on the list!
Ultimately, this is a problem created by price comparison websites such as GoCompare and others. These “hidden” fees are just a reaction insurers have had to make given the basic premium is sold by insurers at an underwriting loss – they have to make up the shortfall to run a profitable business. Until the FCA force Price Comparison Websites to be Product Comparison Websites, consumers are always at the risk of not buying the product they need.