Consumer champion Which? has criticised car insurance firms for charging a "poverty premium" to customers who cannot afford to pay upfront. Paying monthly for car insurance costs more because it is essentially a credit agreement, meaning drivers are charged interest or administration fees for spreading the cost.
This means you end up paying more over the long term compared to paying upfront, and the arrangement also appears on your credit report. This type of loan agreement is known as premium finance, and it is estimated that 15 million UK customers use it to pay for car insurance.
Investigation into interest rates
Which? says many of these drivers are under financial pressure and choose monthly payments because they cannot afford the insurance price upfront. The consumer champion launched a mystery shopping investigation involving 30 car insurance providers and brokers, using the same customer profile throughout: a 42-year-old motorist based in Sheffield, driving for 10 years with no claims or incidents in the past five years.
The investigation found five companies offering what Which? considers extortionate interest rates, above typical credit card APRs. The highest APRs came from insurance brokers, who can charge their own interest rates if they arrange a premium finance credit agreement.
Highest APRs found
City Insurance charged the highest interest rate at 53%, followed by UDrive Cover Ltd (50%), Sterling Insurance (38%), Rightsure (34%) and Acorn (33%). City Insurance told Which? it is currently reducing its APR to 36%. In cash terms, these figures represent as much as £367.75 added to a typical car insurance bill, turning a £2,583.23 annual policy from Rightsure into a £2,950.98 one.
The median APR across all 36 quotes analysed was 26.2%, compared to the median credit card APR of 25.9%. Just 14 providers charged interest under 25%, and only two insurers, Marshmallow and Motorcade, charged 0% APR, though Which? said this does not mean they were the most affordable overall. Quote Detective added the most to its quote for paying monthly, with a total monthly cost of £1,756.03, which was £244.76 (16.20%) higher than the annual premium of £1,511.27. An APR figure was not provided as part of the online quote.
Call for a ban
The findings come after the Financial Conduct Authority concluded a market study in March 2026, where it ruled out a price cap or ban on charging interest for pay-monthly policies. The regulator claimed its current rules were sufficient to address poor behaviour among insurers.
Rocio Concha, Director of Policy and Advocacy at Which?, said: "Too many consumers have already been pushed out of driving or into financial peril because of these unfair pricing practices that we’ve found can charge less wealthy customers more."
"Our latest investigation exposes the consequences of the regulator shying away from its responsibility to ensure competition works for consumers," she added. "The Prime Minister has pledged to create more ‘breathing space’ for consumers, and that’s why we’re urging him to use the upcoming budget to announce a ban on two-tier pricing for motor insurance. We believe it is the best way to create a fairer, more competitive system that doesn’t punish the customers least able to pay."
City Insurance said: "We have been reviewing our premium finance arrangements and the APR charged to customers, particularly following the recent market review of premium finance. As part of that review, we have agreed new terms which will reduce the representative APR from the 53.03% rate as identified by Which? to approximately 36%, based on a flat-rate charge of 13.25%. The new terms will be introduced shortly once the revised contractual arrangements have been completed."
RightSure said: "As an insurance broker, we do not control all of the factors that contribute to the total price payable by a customer. However, APR alone does not necessarily demonstrate the value provided to a customer."
Sterling Insurance said: "We are a specialist non-standard insurance provider, providing insurance cover to customers and risks that are often difficult to place within the standard insurance market, while seeking to maintain competitive and affordable premiums."
The Mirror contacted UDrive Cover and Acorn for comment.
