Consumers paying for car or home insurance in monthly instalments could be facing costs up to 50% higher due to elevated interest rates, according to research from consumer group Which?.
The study revealed that many insurers impose steep annual percentage rates (APR) on monthly payment plans, with some charges as high as 45%.
A report revealed the financial burden placed on drivers and homeowners who are unable to pay for their insurance policies upfront, raising concerns about the fairness of this practice.
Which? has called for the Financial Conduct Authority (FCA) to step in, describing these high interest rates as a “tax on being poor” and urging the regulator to take action.
Customers typically have the option to pay their insurance annually or in monthly instalments. Paying monthly can help spread the financial burden of a large upfront payment, particularly for car insurance, where the average annual premium is £622.
However, this convenience comes at a price, as insurers often charge interest on monthly payments.
Which? found that while the average APR for car insurance is 22.33% and for home insurance 19.83%, some providers charge much higher rates. For example, iGo4 was found to charge 45.1% APR for its monthly payment option.
The survey identified several insurers with high APRs on monthly payments for car insurance. Co-operative Insurance was found to have the highest average APR, charging 29.89%. Other major insurers, including the AA, Hastings Direct, and Swinton, also charged between 26.9% and 33.8%.
The report also highlighted similar patterns in the home insurance market. Co-operative Insurance again topped the list, charging 29.89% APR for monthly payments. Other big names, such as Tesco and Admiral, charged rates ranging from 19.9% to over 25%.
Some insurers, such as NFU Mutual and Hiscox, offer customers the option to pay monthly without charging any interest. These companies provide an alternative to consumers facing high fees elsewhere in the market.
Which? has criticised the current interest rate practices, arguing that many consumers paying monthly do so out of necessity rather than choice. The group contends that charging higher rates to these consumers is unjust, especially given the minimal risk faced by insurers.
While policies can be cancelled if payments are missed, insurers are still charging interest rates similar to those applied to credit cards, where lenders face significantly higher risk.
Rocio Concha, director of policy and advocacy at Which?, stated that many customers end up paying more for insurance simply because they cannot afford to pay annually. She described this practice as “blatantly unfair” and urged the FCA to step in with regulatory action.
Which? has called for the FCA to create an action plan requiring insurers to disclose profit margins between monthly and annual payments. The consumer group is also pushing for deadlines to reduce APRs and penalties for those that do not comply.
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