Car insurance firms have been criticised for charging the “poorest” the most, as campaigners call for an end to unfair monthly payment charges. An investigation by consumer champion Which? showed that drivers who cannot afford to pay for an annual policy upfront can face interest rates as high as 53% APR.
Investigation findings
Premium finance allows customers to pay for their policy in monthly instalments rather than annually, with an estimated 15 million people across the UK opting to do this. The consumer group carried out a mystery shopping investigation in August, collecting premium finance quotes from 30 motor insurance providers to assess the deals on offer.
The median APR across 36 quotes analysed in the mystery shopping investigation was 26.2%, although some rates were as high as 50%. Which? said this compared with around 25.9% for a credit card APR, according to its analysis of Moneyfacts data. Some firms in the research charged 0% APR, and some did not provide APR quotes.
Industry response
Which? also said firms told it that premium finance is associated with higher credit risk, and that assessing APR in isolation does not provide a complete assessment of the value provided to customers. Firms also told Which? that premium finance arrangements were under review to potentially reduce APRs.
But Which? argued that motor insurers should be banned from charging extra for monthly payments and required to offer a pay-monthly option. Rocio Concha, director of policy and advocacy at Which?, said: “Too many consumers have already been pushed out of driving or into financial peril.” She said that a “ban on two-tier pricing for motor insurance” would “create a fairer, more competitive system that doesn’t punish the customers least able to pay”.
Campaigner and industry views
James Daley, managing director of Fairer Finance, said: “It can’t be right that the poorest people in our society are forced to pay the most for their car insurance.” Graeme Trudgill, chief executive of the British Insurance Brokers’ Association (Biba), said: “Premium finance serves a valuable purpose, helping consumers to spread the cost of their insurance cover.
“It is important that anyone involved in arranging premium finance can demonstrate that they are offering fair value and that they are transparent about the cost of the finance to their customer. The FCA’s recent report on premium finance highlighted that, typically in the broker market, APRs inclusive of any broker commission are generally comparable to other forms of credit a customer could obtain to pay for their insurance cover. We continue to help our members to show that their overall package to consumers offers fair value through our fair value assessment framework, and we also have a member guide to refer to when arranging premium finance.”
A spokesperson for the Association of British Insurers (ABI) said: “Many households are under financial pressure, making the protection that insurance provides against unexpected shocks more important than ever. We know that people value the option to pay monthly to keep their insurance affordable and accessible. Providing pay monthly options involves some costs for insurers, including keeping cover in place for a period if payments are delayed or missed. When an APR is charged, our members are committed to ensuring it’s fair, transparent, affordable and proportionate for their customers.”
