Car Insurers hit with nearly 40% charge for paying monthly

17th April 2024

Car owners are being hit with eye-watering annual percentage rates (APR) of nearly 40 per cent when paying for their insurance monthly, a new Which? investigation has found.

The 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.

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.”

James McCaffrey, spokesperson for TotallyMoney said “Charging almost 40% interest on insurance is nearing the rates offered by some subprime loan providers — but what’s really concerning is that firms aren’t making it clear to customers.

“People’s finances have hit the skids in the past few years, and insurers need to put them in the driver’s seat. It should be clear to everyone that insurance is a financial product, and that if you pay monthly you’ll incur interest, or that you might be able to access better options with a better credit score.

“Insurance should be transparent, easy-to-understand and to compare against other forms of finance — because if it was, customers could calculate if they’d be better off taking out a loan to pay for their insurance upfront.”