Drivers who cannot afford to pay for their car insurance annually are being charged interest rates that are higher on average than those on credit cards, according to new research from Which?. The consumer organisation is calling for a ban on motor insurers charging extra for monthly payments.
Premium finance costs more than credit cards
Premium finance lets customers pay for their policy in monthly instalments instead of a single annual payment. Which? estimates that around 15 million customers across the UK use this method to pay for motor insurance.
A mystery shopping investigation of 30 motor insurance providers found that customers could be charged higher interest rates through premium finance than on a credit card. On average, the annual percentage rate (APR) for premium finance quotes was 26.2%, with rates ranging from 0% to 50%. In contrast, the average credit card APR was lower at 25.9%, according to analysis of Moneyfacts data.
Which? calls for fairer system
Which? has called for a ban on two-tier pricing for motor insurance. Rocio Concha, director of policy and advocacy at Which?, 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”.
The organisation also wants insurers to be required to offer a pay-monthly option, so that people who cannot pay upfront can split the costs on an equal footing.
Industry responds to findings
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.”
The quotes were based on a customer profile of a 42-year-old motorist based in Sheffield, driving for 10 years with no claims or incidents in the past five years.
Firms told Which? that premium finance is associated with higher credit risk, and the consumer organisation said assessing APR in isolation does not provide a complete assessment of the value provided to customers. Firms also said premium finance arrangements were kept under review to potentially allow APRs to be reduced.
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 is 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.”
