Car owners who pay for their insurance monthly rather than with a one-off lump sum are being charged interest of more than 30%, research has found, in what has been described by campaigners as a “poverty premium”.
Insurers give customers the choice of paying one annual premium or breaking it up and paying over the course of the year.
However, while the monthly payments are lower, the total cost is typically higher because the premiums are treated as a loan, and insurers add an interest rate to the payment.
The interest on this arrangement, premium finance, ranged between 20.50% and 36.33%, research by the consumer group Which? found.
It highlighted a policy from the insurer 1st Central that had an interest rate of 36.32% for 18-year-old drivers – meaning they would pay an extra £504 on top of an annual premium of £3,388.
The insurer told Guardian Money that it charged a range of rates between 33.50% and 39.11% but its policies still often appeared as among the cheapest on comparison websites.
Recently, the financial regulator hinted that it could ban the practice. In an interview with the trade magazine Post, the Financial Conduct Authority’s head of car insurance, Matt Brewis, said premium finance was a “poor product”, and that he agreed “wholeheartedly” with those who said it was a poverty premium.
Martin Coppack, the director of Fair By Design, which campaigns for equal pricing, said: “We have two types of markets. One that works for the heathy and the wealthy, and one that penalises you for being poor.
“Many people on low incomes need to have a car, and if you have a car, you have to have car insurance. It’s the law. But, as the research shows, the poorer you are, the more you pay.”
Rocio Concha, the Which? director of policy and advocacy, called on the FCA to outline an action plan to tackle the unfair costs of paying monthly for insurance.
“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,” she said.
1st Central said: “At 1st Central, we focus on keeping premiums as low as possible, whether customers are paying monthly or annually. Those who opt to pay monthly will pay slightly more, as it costs more to provide insurance in that way. We work hard to support our customers and recognise that circumstances can change throughout a policy, so we encourage customers to contact us in this eventuality.”
