British motorists could be paying more than £300 a year extra for their car insurance if they pay monthly for their cover compared to annually as experts brand the practice “poverty premium”.
New data has found that drivers who pay for their car insurance on a monthly basis can end up paying hundreds of pounds more than those who pay for them annually.
According to consumer champion Which?, monthly payers using GoCompare in December 2023 paid £892 on average for cover, compared to £583 for those who paid annually – a difference of £309.
The gap between the two groups continues to rise, with the difference in December 2018 standing at £207 and £251 in September 2022.
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Some drivers could see their annual insurance prices increase by more than £500 if they pay monthly
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This could hammer the finances of some drivers more than others, especially those who have recently passed their driving test.
Motorists under the age of 21 generally have the highest premium prices, in addition to being more likely to pay for their cover on a monthly basis, rather than in one lump sum.
Data from the Financial Conduct Authority (FCA) found that 33 per cent of insurance customers paid monthly for their coverage in 2022.
In a study by Which? it was found that an 18-year-old would be forced to pay a staggering average amount of £459 in extra costs for paying monthly.
Younger drivers are being forced to pay enormous extra rates in comparison to £41 in costs for a 59-year-old and £82 for a 39-year-old.
Rocio Concha, director of policy and advocacy at Which?, 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.”
The consumer champion is calling on the FCA to unveil a number of new changes to help drivers save money on their insurance costs.
Which? suggests publishing an analysis every six months of insurance firms’ interest rates to “name and shame” those with the highest rates and encourage competition among providers.
It recommends that the FCA also assesses how much it costs to provide premium credit and take action against any firms that are charging monthly customers excessive interest rates with a deadline of June 2024.
The FCA head of insurance Matt Brewis has previously labelled premium finance as a “poverty premium”.
By using a range of online price comparison websites, drivers could be charged more than £500 extra in average costs for paying monthly rather than annually.
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Drivers who have recently passed their test face expensive extra costs
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An 18-year-old would face an extra cost of £504 in total, on top of an annual premium of £3,388 to protect their vehicle.
Which? has previously written to the insurance industry to warn providers that they may be breaking rules by charging extortionately higher prices for people paying monthly.
