Some insurers charging eye-watering ‘tax on being poor’ to pay monthly, as Which? reveals rates for dozens of policy providers
The same study found some home insurers charging up to almost 35 per cent APR on monthly payments.
The consumer champion is now calling on the Financial Conduct Authority (FCA) to get a grip of firms charging high amounts of interest on monthly repayments, which can penalise customers who are less able to pay for their cover in a one-off lump sum.
Which? asked 39 car insurers and 34 home insurers what APRs were being applied to monthly payments and where there was more than one rate, what made the difference.
For car insurers, the highest rate was 1st Central’s 39.11 per cent - it charges between 5 per cent and 39.11 per cent, giving each customer a personal interest rate after a credit risk assessment.
The average rate across 27 providers that charge interest and disclosed their rate was 23.37 per cent.
Only two (5%) car insurers asked - NFU Mutual and Hiscox - said they do not charge interest on monthly repayments.
Some firms were difficult to extract this information from, with ten car insurers refusing to disclose their rates to Which? - AXA, Budget, Dial Direct, Esure, First Alternative, Geoffrey Insurance, Nutshell, Sheilas’ Wheels, Swiftcover and Zenith.
Markerstudy, which provides insurance under the Bradford & Bingley, Budget, Dial Direct, Zenith, Geoffrey Insurance and Nutshell brands, told Which? it performs “regular assessments (at least annual) on the rates of credit we offer our customers” and that they 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.”
A spokesperson for Axa said,
“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.”
The research follows previous Which? investigations that found that those who pay for cover in monthly instalments can end up paying hundreds of pounds more over the course of a year due to interest on payments.
For example, when Which? researchers ran quotes last November for a real 18-year-old driver, First Central’s Premier Online policy (costing £3,388 to buy upfront), came with an interest rate of 36.32 per cent APR to pay monthly - adding a further £504.
First Central told Which?,
“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.”
For home insurance, the highest rate was charged by Co-op Insurance - where customers pay between 31.31 per cent to 34.75 per cent APR on monthly payments. The average among providers that charged a rate and disclosed it to us was 23 per cent.
Co-op Insurance told Which? that it,
“welcomes” the findings, noting the “importance” of “giving customers the option to spread the cost of their insurance over the course of a year.” After benchmarking their rates, they said “we are looking to reduce them; we will update our customers on this as soon as we can.”
Fifteen (44%) home insurance providers surveyed said they do not charge interest - Bank of Scotland, Halifax, Hiscox, HSBC, Lloyds Bank, MBNA, M&S Bank, Nationwide Building Society, NFU Mutual, SAGIC, Sainsbury’s Bank, Santander, TSB, Urban Jungle and Yorkshire Building Society.
Seven providers refused to disclose their rates - AXA, Bradford & Bingley, Budget, Dial Direct, Esure, Sheilas’ Wheels and Swiftcover.
The higher rates charged by insurers to pay for cover monthly resemble interest applicable for credit card borrowing. In January of this year, the average credit card rate was 34.8 per cent with the majority of cards charging up to 25 per cent compared to the average car insurance premium finance rate of 23 per cent and highest rate of 39 per cent. However the risk to insurers is much lower because the credit being offered is directly linked to the sale of the insurance policy and non-payment by customers can lead to the cancellation of the policy.
Matt Brewis, the Head of Insurance at the FCA, has also recently described premium finance as “a tax on being poor. Those who are paying monthly are subsidising those who can afford to pay annually.”
Since January 2022, motor and home insurers have been required to provide fair value on their products - and those requirements have been further strengthened by the introduction of the Consumer Duty last year. However, motorists and homeowners who are unable to pay for cover all in one go annually are being unfairly penalised by high interest rates on monthly repayments.
Which? is calling on the FCA to produce an action plan to make sure that firms are providing fair value in the interest rates they are charging customers.
The main comparison sites do not show the APR charged by individual insurers, making it more difficult for customers to compare across providers, as they can for credit card providers’ APRs. Therefore, as part of this action plan, the consumer champion believes the regulator should publish a league table every six months of the best and worst providers, with tough punishment taken against those found to be charging unfairly high amounts of interest.
Which? Director of Policy and Advocacy Rocio Concha will be appearing in front of the Treasury Select Committee today (17 April) to discuss how the insurance sector can work better for consumers.
Rocio Concha, Which? Director of Policy and Advocacy, 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 rates of interest.
“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.”
-ENDS-
Notes to Editors
In March 2024, Which? contacted 39 car insurance providers and 34 home insurance providers, and asked them about their interest rates for monthly-paying customers and how these are set.
In most instances, one figure was provided, while some insurers provided a range. Researchers used the range of rates to calculate an average of rates across all providers.
Which? Director of Policy, Rocio Concha, will be giving evidence in front of the Treasury Select Committee today (Wednesday 17 April) at 2.15pm. To watch the event click here.
Right of replies
A spokesperson for First Central 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 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.”
A spokesperson for Co-op Insurance 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.”
A spokesperson for AXA said:
“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. Therefore, we have set out the average premium finance rates our customers are paying for both Home and Motor below. Their rate is clearly shown to customers when they choose a monthly insurance option with AXA.
Home – average premium finance rate: 7%
Motor – average premium finance rate: 10%
“As previously mentioned, 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 and FCA on industry reforms, including those that can help in addressing concerns around affordable insurance premiums for customers.”
Esure, First Alternative and Sheilas’ Wheels declined to comment.
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