MoneySupermarket have found that on average people are being charged an extra £73 to pay their car insurance monthly. And as more than 45% of people do this.
Do people realise the extra cost?
The Financial Conduct Authority’s Thematic Review of Provision of premium finance to retail general insurance customers may sound dull – but read on if you are one of the millions who pay for your car and household insurance monthly.
The FCA report concluded that many people may be being misled about the true cost they are paying.
Many people don’t realise that if they decide to pay monthly this is a form of credit. You are borrowing the full annual premium, repaying it in monthly installments and usually being charged interest on this borrowing.
About half of all UK car and household insurance is purchased online. The FCA review involved 13 insurers and 30 brokers/price comparison websites. It looked at their websites, investigating the “customer journey” up to the point where the customer enters payment details.
The FCA wanted to see if the websites give the right information to enable the customers to make a good decision. This information needs to be given early enough in the process, not right at the end when you have already decided which insurer to use.
Linda Woodall from the FCA said:
“Consumers should expect clear information about the payment options available to them. Regardless of whether people choose to pay upfront or in instalments, it’s important that they can see exactly what they are signing up for and how much it costs so they can decide whether they are getting a fair deal.”
The results of the review
The FCA found that:
- people were sometimes only told what the monthly payments would be, not the total cost of paying this way;
- sometimes the monthly payment was emphasised as this makes the difference look small, and the total cost of paying this was was in much smaller print;
- sometimes interest rates weren’t quoted at all;
- a wide variety of APRs are charged, from zero to over 75%, as this graph shows:
Wow – 75% !
Indeed. And most firms are charging over 26%. This is a very profitable sideline for the insurers and the lenders.
Can you avoid this rip-off?
The simplest way is to not pay monthly but to pay the whole amount at the start. If you can afford to do this, it’s going to save you money.
But many people can’t afford to do this. It’s an example of the “poverty premium” – a situation where the well-off get things cheaper than those who are struggling.
If you have to pay monthly, the key thing is to look out for the total amount that you will be paying over the year. Use that to decide whether to go with insurer X or insurer Y.
You might be thinking that it would be cheaper to put the annual amount on your credit card, where you are “only” paying 21% interest. Well it might be… but only if you pay off the whole amount during the year. Otherwise you will still be paying this year’s car insurance next year and the year after etc and the total cost will end up even higher.