The cheapest and most expensive car and home insurers for paying monthly

Some people who can't afford to pay their insurance premiums upfront are being charged eye-watering amounts of interest to do so monthly, according to Which? research.

With car insurance premiums continuing to soar - and prices of over £3,000 now typical for younger drivers - Which? has found that many who can't afford their premium upfront face interest costs of 30% APR (annual percentage rate) or more. This is comparable to the more expensive credit card rates.

Among firms we surveyed in March, average APRs from those that charge interest and would disclose their rates were 23% for both car insurance and home insurance. However, car insurer 1st Central - which applies a credit risk assessment to customers - charges between 5% and 39.11%. Meanwhile, home insurer Co-op Insurance applies interest of 31.31% and 34.75% - although it says it plans to reduce its rates.

Several providers, including Axa, Esure and Markerstudy - refused to tell us their rates.

Here, we'll show you how the different providers compare, why we think high interest rates are unfair in insurance, and how to bring your premium down - even if you can't afford to pay annually.

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Interest rates for paying monthly compared

In March, we contacted 39 car insurance providers and 34 home insurance providers and asked them what interest rates they charged for monthly-paying customers and how these are set. In most instances, one figure was provided, while some insurers provided a range.

The table is ranked by the highest maximum rate charged on car insurance.

• Find out more: check out how we find the best car insurance providers and the best home insurance providers 

Why high interest rates are unfair

If you pay your insurance premium in instalments - known as 'premium finance' - the insurer may charge interest because it's effectively lending you the annual premium - which you then repay month by month. 

Not all providers charge interest - with almost half of the home insurers we quizzed telling us they don't. Hiscox and NFU Mutual told us the same when it came to their car insurance customers.

Among those who do, the higher rates charged by insurers to pay for cover monthly resemble interest applicable to credit card borrowing. In January this year, the average credit card rate was 34.8% APR - with the majority of cards charging up to 25%. Meanwhile, the average APR charged by home and car insurers was 23% APR - with the highest rates more than 30% APR.

However, credit card lenders and insurance firms arguably face very different kinds of risk when offering credit. If you're £1,000 in debt to a credit card lender, for example - and fail to repay - there's a chance the lender will never see this money again. However, if you've taken out car insurance with an upfront price of £1,000 - and default on monthly payments - the insurer can cancel the policy by giving (in most cases) a week's notice. They do face some financial losses in this scenario - especially if you've claimed - but if you can't maintain payments, you won't receive the benefit of a full year's cover. 

Consequently, we think that some customers who pay monthly are being charged interest rates that are disproportionately high when considering the modest risk the insurer takes on.

'Tax on being poor'

We're not alone in our criticism of premium finance. Matt Brewis, Head of Insurance at the Financial Conduct Authority, recently described premium finance as a 'tax on being poor,' saying: 'Those who are paying monthly are subsidising those who can afford to pay annually.'

Sales data shared with Which? Money last year by comparison website GoCompare revealed that customers paying monthly forked out £300 more, on average, for car insurance than those who paid for cover upfront. The data also showed that this difference in cash terms has widened in recent years. Some of this can be explained by demographic factors - with younger drivers (who typically pay more anyway) more likely to also pay by the month than older drivers.

However, when we ran some test quotes last November, we found that interest rates alone could add hundreds of pounds to the cost of insurance - with one customer quoted £504 extra for using premium finance.

• Find out more: Is car insurance failing the value for money test?

'It's time to get tough with firms'

Which? is calling for the FCA to publish a league table of the best and worst providers of premium finance every six months, with tough punishment taken against those found to be charging unfairly high amounts of interest. 

Rocio Concha, Which? Director of Policy and Advocacy, will appear before the Treasury Select Committee today to discuss how the insurance sector can work better for consumers. She said: 'Motorists need car insurance to be on the road legally, and the vast majority of mortgage lenders will insist on homeowners having cover - yet those who can’t afford to pay for their premiums all in one go are being penalised with eye-watering interest rates. 

'The regulator has been clear - paying for insurance monthly is a tax on being poor, and it’s shocking to see providers still trying to justify the practice. Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually. 

'It is now time for the FCA to step up and to get tough with firms that take advantage of customers who can least afford it.'

What the insurers say

A spokesperson for 1st Central, which charged the highest rate in our survey, said:  'We understand it is important to customers that we keep the price of insurance as low as possible – and benchmarking tells us that we are competitive for both annual premiums and for those that wish to pay monthly through a credit arrangement. We offer a range of APRs from 5% to enable us to provide credit to as many customers wishing to pay monthly as possible, including those with low or poor credit scores. Over the past quarter, less than 2% of customers paid our highest APR.'

A spokesperson for Co-op Insurance, which had the highest rates for home insurance customers, said: 'Co-op Insurance welcomes this survey analysis from Which? We recognise the importance of premium finance as a product in the insurance industry, giving customers the option to spread the cost of their insurance over the course of a year. Our insurance partner, Markerstudy Distribution, performs regular benchmarking on the rates of credit they offer to our customers. This benchmarking has led us to review these rates, and we are looking to reduce them; we will update our customers on this as soon as we can.'

Some insurers we contacted were unwilling to disclose what interest rates they charge their monthly customers. A spokesperson for Markerstudy - which provides insurance under the Bradford & Bingley, Budget, Dial Direct, Zenith, Geoffrey Insurance and Nutshell brands - said: 'Offering customers the choice to pay for their insurance via premium finance makes insurance accessible for all, particularly in today’s market. We recognise the importance of ensuring the premium finance arrangements provide fair value and deliver good customer outcomes. At Markerstudy Distribution, we perform regular assessments (at least annual) on the rates of credit we offer our customers. We are confident that we have the appropriate governance, oversight and controls in place to ensure our premium finance provides fair value and delivers appropriate customer outcomes.'

Meanwhile, AXA told us: 'We believe that using representative APR provides an inaccurate comparison of the interest rates insurance companies charge to customers for paying monthly. This is because firms calculate representative APR in different ways.' AXA says that, on average, its car insurance customers pay 10% more if paying monthly than they would annually, while its home insurance monthly customers pay 7% more. It said its customers' rates are shown clearly when they choose a monthly option with AXA.

It went on to comment: 'This percentage varies depending on individual circumstances, and a range of factors are taken into consideration. AXA is supportive of any measures that will lead to better customer outcomes and will continue to work with the ABI [the insurance trade body, the Association of British Insurers] and FCA on industry reforms, including those that can help in addressing concerns around affordable insurance premiums for customers.'

The Esure Group - which sells through the Esure, First Alternative and Sheilas' Wheels brands, declined to comment.

• Find out more: what you need to know about the ABI's plan to tackle soaring car insurance premiums

How to keep costs down if you can't afford to pay annually

Our five tips can help you get the best possible premium and spread payments in an affordable way:

1. Shop around: While car insurance premiums have been rocketing and home insurance costs are also on the rise, you may still be able to save by shopping around at renewal - including checking what your existing insurer will offer if you apply for a new quote through its website.  
2. Haggle: Our research has found that many insurers are still open to negotiation. Give your insurer a call if you're unhappy with its quote. This will be even more likely to yield results if you've researched what other prices you can get.
3. Consider other forms of credit: If you can't afford your premium in one payment, consider other ways to spread the cost, such as paying by interest-free credit card and paying off a 12th of the card's balance each month.
4. Add another driver (for car insurance): If you're a young driver, one way you may be able to bring your premiums down is by adding an older driver (for example, a parent) as a named driver on the policy. The insurer looks at the combined risk of all drivers that use the car, so the addition of a lower-risk driver can help reduce the price. Remember, don't list the other driver as a 'main driver' if you drive the car the most. This is technically a kind of fraud known as 'fronting'.
5. Consider 'Black Box' insurance: 'Telematics' policies - also known as 'black box' cover - use technology to track your driving in real-time. If the data shows you're a safe driver (depending on the policy, factors considered include the times of day you drive, braking, cornering, speed and mileage), you'll get reductions on your premium.  

Find out more: how to find cheap car insurance

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