James Daley

By James Daley

Paying for your insurance in monthly instalments seems like a reasonable thing to do in this day and age – especially if you’re a young driver paying a four figure sum to get on the road. For many it’s the only way we can afford to pay for our insurance.

But rather than letting customers pay as they go, insurers have concocted a very odd and expensive way of giving people the kind of flexibility that would come as standard anywhere else.

If you want to pay your home or car insurance by the month, your insurer will lend you the money to pay your whole year’s premium up front, and will then charge you a high rate of interest for the privilege of paying it back in instalments. In some cases, they’ll get someone else to lend you the money, and will take a commission for setting up the credit agreement.

Uniquely expensive

This just wouldn’t fly in any other sector. Mobile broadband companies, gas and electricity suppliers, gyms – they all want you to sign up for a year or more to get the best deals. But rather than loaning you the money to pay for a year in advance, they simply get you to sign an agreement that says you’ll keep on paying till your contract runs out.

And if you want to switch early, there will be penalties to pay – which seems fair enough.

It would be reasonable of insurers to tell us that we need to pay for the full year if we decide to cancel after we’ve made a claim. Although I’m still not sure why we need to buy our insurance in annual chunks anyway.

The insult to injury when it comes to insurers lending us money - is that the rates of interest that are charged are enormous. In our latest deep dive, we found companies charging annual percentage rates of almost 100%. Small insurance brokers seemed to be the worst. But even household names like Endsleigh and Debenhams are charging interest rates of over 40%.

These are the kind of interest rates that would usually be associated with people who have extremely poor credit scores. Yet – they’re offered to everyone.

On average, rates are 20-25% - which is just an extra tax on the people who can least afford it.

Trip wires

Perhaps worst of all is that a number of insurers and brokers seemingly try and push customers into paying monthly when they don’t want to.

When you go to a comparison site, it will ask you whether you prefer to pay annually or monthly. Yet even if you’ve said you want to pay annually, you may find that by the time you’ve selected your preferred quote and gone through to the insurer’s website –you’ve been auto-opted into paying monthly.

This is not an accident. We started mystery shopping insurance websites two and a half years ago. Back then, almost a third of major insurers were up to this trick.

Since then, a large number have stopped doing it, in response to our feedback. But some companies haven’t changed.

The AA is one big broker that still does it – even after a complete relaunch of its website. Endsleigh is another. And in the case of Prudential, they even confirm that you have chosen to pay annually, but then switch you to paying monthly once you get to the point where it’s time to pay.

No need for credit in the insurance world

Personally, I’d like to see credit removed from the insurance sector altogether. I just don’t think it’s necessary. It complicates the product – and means that as well as a 50-page policy booklet, customers are served up with terms and conditions for a loan.  Most don’t read the policy booklet – which is a problem in itself. No one reads their insurance payment plan credit agreement.

I’m not holding my breath for the regulator to go and ban credit in insurance. But if expensive credit is to stay, then companies must at least help customers understand what they’re getting into. The most important part is making sure that customers can see what it would cost to pay annually next to what it would cost to pay monthly – so they can clearly see what the extra cost is in pounds and pence.  The difference can be hundreds of pounds.

As it stands, insurers either deal with the issue of the loan by inserting a chunk of tiny text that no one can read – or by blinding the customer with numbers. In many cases, they mention both an interest rate and an Annualised Percentage Rate (APR). And there’s little consistency around how they calculate the interest rates that they quote.

In the meantime, what can you do? Well, it’s all very well for me to tell you to always pay for your insurance up front. You might not be able to afford to. But if you do need to pay in instalments, consider whether you can put it all on a 0% credit card for 12 months, and pay it off without any interest.

You might not think that’s worth the hassle if the cost of borrowing amounts to a few tens of pounds. But if your insurance runs to hundreds or even thousands of pounds, the cost of paying monthly can add up to a hundreds of pounds on top – which is an amount of money worth saving.

If you can’t get a 0% credit card, look out for some of the companies that don’t charge at all. NFU Mutual, the Civil Service Insurance Society, Age UK – none of these charge for paying in instalments. I’m hoping that others will follow in their footsteps over the next few years.

This article first appeared in the Telegraph. View the article here