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Car insurance: how much could you save by paying annually?

Drivers who spread the cost of their insurance are quoted higher prices

Drivers could save an average of £59 a year by paying for their car insurance upfront. 

New research by Compare the Market found that motorists who spread the cost of their car insurance end up paying more, at a time when the cost of driving is soaring.

Here, we explain the benefits of paying annually if you can, and offer advice on how to save when renewing your policy. 

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The cost of paying monthly for car insurance

Drivers who spread the cost of their car insurance pay an average of £59 a year more than those who pay upfront.

Compare the Market says the average annual car insurance premium costs £693. This rises to £752 if the driver chooses to pay in instalments. 

If you pay monthly for your car insurance, you effectively take out a loan from the insurer - and in some cases this comes with a high rate of interest. 

How payment plans work

If you don't want to - or aren't able to - pay in one go, some insurers offer 12-month payment plans, where the insurance cost is spread evenly over the full year. 

Others use 11-month plans instead. These involve paying a deposit (typically 20% of the premium, or two months' worth of payments), followed by 10 monthly payments to cover the remainder.

The below example shows how this might look on a car insurance quote of £350.

12 monthly payments £29.16 a month for 12 months
Deposit and 10 monthly paymentsInitial payment of £58.32, followed by 10 monthly payments of £29.16

Will paying monthly affect my credit score?

Opting for monthly payments can have an impact on your credit report

When you search for insurance quotes, the provider or price comparison website will often run a 'soft' credit check to confirm your details. This won't affect your score or be seen by other lenders or utility providers.

If you then choose to pay your premium in instalments, the insurer might run a 'hard' credit check to ensure you can afford the payments. This would show on your credit report and could affect your score.

After that, it's all about whether you pay on time. If you make all your payments on time, your score could go up, but if you miss a payment, it could go down.

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What to do if you can't pay in one go

Paying monthly allows you to split the cost of insurance into more manageable chunks. This can be helpful if you have a high premium (for example if you've just passed your driving test), but, as we mentioned earlier, it can also be more expensive in the long run.

There are some alternatives to taking the monthly payment options offered by insurers. 

For instance, you could consider paying with a 0% purchase credit card. This will allow you to pay off the balance each month without incurring any interest. However, if you want to take out a new credit card to do this, note that any prospective providers will conduct a credit check before approving your application, and that your credit score will be damaged if you don't keep up with repayments.

It could also be worth shopping around to see if you can save money with a specialist policy.

Younger drivers, for example, could benefit from a telematics policy, which offers discounts for safer driving. Likewise, drivers who don't use their cars very often could pay less with a pay-per-mile policy.

What's happening to car insurance premiums?

The most recent data from the Association of British Insurers (ABI) shows that car insurance premiums fell by 5% in the first quarter of 2022.

These price reductions came after new rules were introduced in January to prevent insurers charging existing customers higher prices than new ones. The ABI said it was too early to assess whether these changes were behind the price drops.

Car insurance figures are released on a quarterly basis, so it's likely that we'll have updated numbers on what happened to premiums between April and June in the next few weeks. 

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Tips on cutting the cost of car insurance

1. Don't auto-renew

Your insurer will send a renewal quote around a month before your policy's end date. 

If you do nothing, the policy will usually auto-renew at that price - whether you want it to or not. If you find a better deal elsewhere, contact your provider to cancel the auto-renewal.  

2. Shop around for the best deal

Price comparison websites give an indication of which insurers will offer the lowest premiums, and can help you to compare the levels of cover on offer. 

Don't forget to get quotes separately from insurers that don't appear on comparison sites, such as Direct Line and NFU Mutual. 

3. Get your excess right

Insurance policies have a compulsory and voluntary excess. The combined amount is how much you must pay if you make a claim. 

The compulsory excess is set by the insurer, but you can set your own voluntary excess. A higher excess can cut the cost of your premium, but setting it too high can be a barrier to making a claim.  

4. Don't splash out on extras

Insurers offer a host of add-ons, such as breakdown cover, key cover, legal expenses and personal accident cover. 

Before ticking the boxes, consider whether you actually need these forms of protection, and check if you're already covered elsewhere. For example, some packaged bank accounts come with breakdown cover.

5. Choose a highly rated insurer

Finding the best insurance deal isn't all about price. You'll want to ensure you're choosing a provider that combines a great policy with top-notch customer service should you need to claim. 

Read our car insurance reviews to find out which providers fared well for both customer service and policy coverage. 

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