Motor insurance customers who buy cover monthly can end up paying hundreds of pounds more than those who pay for policies annually, Which? research has found, as the consumer champion calls on the Financial Conduct Authority (FCA) to produce an action plan to tackle the issue. 

Which? used sales data from GoCompare to find the average difference between prices paid by annual and monthly customers between December 2018 and September 2023.

In September 2023, monthly payers using GoCompare paid £892 on average for a year’s cover, while annual payers paid £583 – a cash difference of £309. In December 2018, the gap was £207 (£460 annually vs £667 monthly). In September 2022, the gap was £251 (£738 monthly vs £487 annually), so has steadily widened in cash terms.

This could be explained in part by the fact that younger drivers, who typically pay the highest premiums, are also more likely to pay monthly. However, additional charges for spreading payments on a monthly basis increase customers’ costs further as interest rates of more than 30 per cent can be common. 

Which? consumer insight research found that young people, who are less likely to be financially resilient, were more likely to pay monthly for their motor insurance. 

This follows research from the FCA, which found that a third (33%) of insurance customers overall paid monthly in 2022, but that more than half of consumers with low financial resilience paid for their motor insurance through monthly instalments.

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To get a better sense of how much drivers are likely to pay for their car insurance, in November, Which? analysed the cheapest 15 deals available to three real people via a comparison website. These were a GP living in Kent (59 year-old), a journalist living in London (39-year-old) and a leisure-centre worker living in Warwickshire (18 year-old).

The research found that the 18-year-old faced the highest premiums and largest range of APRs (from 20.50% to 36.33%) compared to 20.90%-30.12% for the 39-year-old. 

The average extra cost for paying monthly for the 18-year-old was £459, but £41 for the 59-year-old and £82 for the 39-year-old. 

It is five years since the FCA found that motor insurance firms were earning as much as £110 per policy, on average, from providing premium financing – the interest added to the original insurance quote for those paying monthly. 

Since then the FCA has warned the insurance industry repeatedly that the interest rates some firms are charging customers paying monthly may be excessively high.

In September 2022, the FCA wrote a letter to the insurance industry which suggested some firms may be breaching FCA rules because the interest rates they are charging do not take into account that insurance policies can be cancelled if consumers do not keep up monthly payments.

The research follows the FCA’s Head of Insurance, Matt Brewis, recently labelling premium finance as a ‘poverty premium’. 

Insurance firms have been required by the FCA since January 2022 to ensure their products provide fair value, as part of product governance rules. The regulator pointed out that APR would likely be ‘the most significant factor in determining whether premium finance provides fair value’. These requirements have been strengthened further by the introduction of the Consumer Duty last year. 

Rocio Concha, Which? 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.

“The FCA must monitor the issue closely, publishing an analysis every six months of firms’ rates, naming and shaming the worst providers. The regulator should also assess how much it costs firms to provide premium credit and shouldn’t hesitate to take action against providers charging monthly customers excessive interest rates.” 

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