Car insurers charging sky-high interest for monthly payments
Car insurance customers choosing to pay their car insurance premiums monthly instead of annually are having to pay interest rates of up to 90%.
A mystery shopping exercise across the UK's 40 biggest car insurers by Fairer Finance found 34 took monthly payments and that Kwik-Fit charges an effective interest rate of 90% for doing so.
At the other end of the charging spectrum, NFU Mutual levied an interest rate of 1.25% and First Direct was the only of the 34 providers allowing monthly payments to do so without charging customers any interest at all.
On average, the interest rate levied for monthly payments across the 34 insurers was 29.7%.
Fairer Finance found that for those drivers with low premiums, interest and charges for paying monthly can bump up their insurance costs by a third.
Its research also revealed that 14 out of the 34 insurers taking monthly payments automatically opt customers coming from comparison websites into monthly payments instead of asking them to decide how to pay from the outset. This is despite customers telling the comparison site they want to be annually.
Fairer Finance reported that the insurance brands automatically opting such customers into monthly payments were 1st Central, the AA, Co-operative Insurance, Endsleigh, Halifax, Lloyds, Marks & Spencer, More Than, Post Office, Prudential, RAC, RIAS and Sainsbury's Bank.
Zurich, which runs the Endsleigh car insurance band, declined to make a statement about automatically opting customers referred to it by comparison sites into monthly payments but said its customers are able to select their preferred payment option, whether monthly or annual.
James Daley, managing director of Fairer Finance, said: "Given that the cost of car insurance can run to hundreds, and sometimes thousands of pounds a year, it's only fair that people are given the option to pay in installments. If insurers feel they have to charge extra for this, they need to play fair and keep their fees and interest proportionate and reasonable."
He added: "The fact that so many insurers are automatically opting customers into paying monthly is even worse. While some may have no choice but to pay in installments, people need to be given the chance to pause and understand the extra cost – not simply bundled into a deal which is going to potentially cost them hundreds of pounds more."
Paul Lawler, spokesperson for MoneySuperMarket, told Moneywise: “MoneySuperMarket helps customers get the best price for their car insurance. We clearly display the annual cost for paying annually and monthly so our customer can see the difference in pricing for the various payment options.
“Likewise when a customer has clicked through to a site, they will be presented with both payment options which the customer can compare at the point of sale but it is important that customers double check their details to make sure the right payment options have been selected by the insurer.”
Lee Griffin from Gocompare.com told us: “We ask people to select how they’d like to pay for their car insurance – monthly or in full – and then on the quote results screen we show them the annual premium if paid in one go, as well as the breakdown of costs associated with paying monthly – namely the deposit, the amount to be paid monthly and the number of instalments, and then the total amount that this represents. This way, people are able to make an informed decision about the best value insurance policy for them."
He added: “When a customer clicks through from our website to an insurer’s site they may find that, in some instances, that changes are made automatically, such as the addition of extra cover, for example – and we notify our customers of this. Likewise, some insurers may make assumptions about the customer’s preferred payment method.
"As such it’s important that people check that everything matches up on the insurer’s website before they buy and, if not, that they make the necessary amendments. This is not only to ensure that their details are correct, but also to make sure that they’re paying only for the policy features that they want, and via the payment option they’d prefer to use.”
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.