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Annual car insurance is a big expense to pay up front. Due to that, pay-monthly car insurance may seem like a good way to spread out the cost. But it may not be the deal you think it is. In fact, paying annually can be a great way to get cheap car insurance.
Pay-monthly car insurance will cost you more overall than paying annually for car insurance on the same policy.
Car insurers say pay-monthly insurance is more expensive because they are, in effect, agreeing to loan you the full cost of the insurance, and for this they will charge you interest. You pay them back for the insurance, plus the interest, in monthly instalments over a year.
Pay-monthly car insurance is very popular. Almost half (46 per cent) of car insurance customers chose to pay monthly, according to Which? and research by comparison site GoCompare. The other half of customers pay up front for annual car insurance.
But the cost for the convenience of pay-monthly car insurance is high – customers who can’t afford to pay up front are being hit by an average £302 penalty to pay monthly, the research from November 2022 found.
Choosing to pay monthly is also getting more expensive over time. In November 2019, pay-monthly car insurance cost on average £673 for the year, while annual car insurance paid up front cost £456 – a penalty of £217 for paying monthly.
By November 2022, the penalty for paying monthly had jumped to £302, an increase of 39 per cent. Pay-monthly car insurance cost £757.60 versus £455.49 for annual car insurance paid up front.
Pay-monthly car insurance can seem like a good idea because it’s becoming more and more expensive to pay for annual car insurance up front.
Average car insurance cost 21 per cent more between April and June 2023 than the same time a year ago, according to the Association of British Insurers’ (ABI) car insurance tracker. This is the highest since the ABI started collecting this data in 2012.
For a year’s worth of private comprehensive car insurance, the average cost was £511, up 7 per cent on the previous three months, according to the ABI data.
Car insurance is particularly expensive for young drivers, making them more likely to choose to pay monthly.
Research from Consumer Intelligence in August 2023 found drivers under 25 years old are facing the steepest increases in the cost of car insurance, with premiums rising 66.7 per cent over the previous 12 months. The average premium for young drivers is now £1,640, according to Compare the Market.
It’s no wonder that, according to GoCompare, younger customers often opt for monthly payments to spread the cost – but this means they also end up paying much more overall.
Low-income households are also more likely to pay monthly and face higher premiums, according to the Financial Conduct Authority.
To calculate the cost of your pay-monthly car insurance, insurers will take the annual cost of the policy and add the interest they will charge you for effectively lending you the full amount while you pay it off.
The amount of interest you’ll be charged varies among different car insurance companies, and they don’t make the information easy to find. But with the average pay-monthly car insurance costing £757.60 versus £455.49 for annual car insurance paid upfront, the payment penalty is a 66 per cent difference, so that gives you some idea.
You may also be charged up to 20 per cent of the annual premium for the first month’s instalment if you choose to pay monthly. The rest of your instalments will be smaller, but you’ll still end up paying more overall because of the monthly payment penalty.
Yes, some insurers offer temporary car insurance for just six months. But it’s not common, so you may not find as many options on comparison sites.
Most car insurance policies will cover you for a minimum of 12 months, but there are some cases where it makes sense to only get cover for six months. For example, this may be a good option if you’re planning to buy a new car within the next six months, you’re lending your car to a friend or family member for a short period, or you just want more time to shop around for a better annual deal.
Six-month car insurance may also be a good option if you can’t afford to pay annual car insurance in one go but can pay up front for a six-month policy.
Pay-as-you-go insurance, or pay-per-mile insurance, is another short-term car insurance option that can be cheaper for people who don’t drive very often or very far.
With pay-as-you-go insurance, you’re only charged per mile or per hour you drive. You must also pay a monthly or yearly fee to insure the car while it’s parked in case it’s damaged or stolen. A small device is fitted to your car to measure your mileage. Pay-as-you-go insurance usually works as a rolling subscription, which you can cancel at any time.
Yes, if you keep up with your repayments. If you have a limited or poor credit history, taking out credit such as pay-monthly insurance and making payments on time every month can improve your score. It’ll show future financial institutions you can manage your money and pay back everything you owe when it’s due.
But if you miss a repayment, even just once or twice, this will harm your credit score and make getting loans or credit cards more difficult and expensive.
Yes, if you pay off what you owe before the interest-free period on your credit card ends and you don’t miss any repayments.
Paying for your car insurance using an interest-free credit card gives you the best of both worlds. You can use the credit card to pay your annual car insurance in one go, then pay off what you owe on the credit card in manageable monthly instalments. You avoid paying interest like you would if you chose the pay-monthly option with your insurer.
It’s important to keep track of when the interest-free period on your credit card ends – standard interest rates jump to around 25 per cent. That’s also the case if you miss any monthly repayments, as you will lose your interest-free rate.
You may need to pay off more than the minimum repayment amount demanded by your credit card provider each month to pay off your car insurance in time. Divide the annual amount you paid by 12 and pay off that amount each month, regardless of what your credit card provider asks for as the minimum repayment.
