11 May 2015
The true cost of paying monthly for your insurance
Car and home insurance can be two of the most expensive bills of the year. For a young driver, cover for their motor can run to thousands of pounds. While insuring your home can also be a pricey endeavour if you live in the wrong postcode, or too near a river.
So it's just as well that most insurers cut customers some slack, and allow them to pay month by month - rather than forcing them to find the money upfront. Sadly, however, it's yet another part of the day to day service which comes at a premium cost.
Most insurers charge interest of well over 20% for customers who want to pay monthly for their cover - and some charge fees for arranging the credit as well.
These interest rates and charges have always seemed to have a hint of the exploitative about them. After all, it's a perverse reality that insurers have persuaded us to accept. They tell us that we have to buy our insurance for a period of one year. But if that's too much to stump up, they're happy to loan us the money at an extortionate rate, and add the interest to our bill.
Credit where it's not due
Rather than convoluting the story by introducing the idea of credit, I've often wondered why insurers couldn't simply be a little more flexible and offer to insure people from month to month. If the cost of getting customers in the door is too high to have people switching after a few months, then why not tie them into minimum contract length of, say, 12 months - like the phone companies do? It's hard to understand how we got to this strange world where people are forced to borrow money to pay for their insurance upfront.
If we're to accept this reality at all - then it's vital that insurers are at least crystal clear about what they're charging people and why. But as I've written on this blog before - and as the FCA has concluded in a thematic review of the sector today - insurers are often not clear about the costs of paying monthly.
For a start, many are not upfront about who is arranging the loan. And I've often found that the stated APRs don't tally up with our own calculations. Fees and charges are also not always clear.
This lack of transparency is all the worse given that so many insurers still try and nudge customers into paying monthly - even when they've opted to pay annually. Fairer Finance research found that 13 out of the largest 44 car insurers automatically opt customers into paying monthly, even after they've told the comparison site that they want to pay annually.
A few insurers also charge you a higher premium for choosing to pay monthly (before they’ve even added on the cost of credit) - as they figure that the kind of person who can't afford to pay their insurance upfront is a greater risk. But this is the kind of information that simply isn't declared anywhere.
A missed opportunity?
The FCA's review published today amounts to little more a yellow card for the industry - and a request that they are more transparent.
I can't argue against that recommendation, but I wonder whether this is a missed opportunity for a wider debate about whether credit is appropriate in this market at all. There's also no discussion about what a reasonable interest rate might be.
Of the 38 firms that the FCA looked at, 14 were charging interest of over 30% - rates which are usually reserved for people with very poor credit histories.
There's a chance that greater transparency will lead to greater competition around interest rates - but I doubt it. Credit arrangements now account for a slice of profits, which insurers won't give them up unless they are forced to.
As ever, my advice remains that if you need to pay for your insurance by the month, take out a 0% credit card and pay your premiums upfront. There's simply no need to pay the insurance companies' extortionate interest rates.