Among firms we surveyed in March, average APRs from those that charge interest and would disclose their rates were 23% for both car insurance and home insurance. However, car insurer 1st Central - which applies a credit risk assessment to customers - charges between 5% and 39.11%. Meanwhile, home insurer Co-op Insurance applies interest of 31.31% and 34.75% - although it says it plans to reduce its rates.
Several providers, including Axa, Esure and Markerstudy - refused to tell us their rates.
Here, we'll show you how the different providers compare, why we think high interest rates are unfair in insurance, and how to bring your premium down - even if you can't afford to pay annually.
Interest rates for paying monthly compared
In March, we contacted 39 car insurance providers and 34 home insurance providers and asked them what interest rates they charged for monthly-paying customers and how these are set. In most instances, one figure was provided, while some insurers provided a range.
The table is ranked by the highest maximum rate charged on car insurance.
Find out more:Why high interest rates are unfair
If you pay your insurance premium in instalments - known as 'premium finance' - the insurer may charge interest because it's effectively lending you the annual premium - which you then repay month by month.
Among those who do, the higher rates charged by insurers to pay for cover monthly resemble interest applicable to credit card borrowing. In January this year, the average credit card rate was 34.8% APR - with the majority of cards charging up to 25%. Meanwhile, the average APR charged by home and car insurers was 23% APR - with the highest rates more than 30% APR.
However, credit card lenders and insurance firms arguably face very different kinds of risk when offering credit. If you're £1,000 in debt to a credit card lender, for example - and fail to repay - there's a chance the lender will never see this money again. However, if you've taken out car insurance with an upfront price of £1,000 - and default on monthly payments - the insurer can cancel the policy by giving (in most cases) a week's notice. They do face some financial losses in this scenario - especially if you've claimed - but if you can't maintain payments, you won't receive the benefit of a full year's cover.
Consequently, we think that some customers who pay monthly are being charged interest rates that are disproportionately high when considering the modest risk the insurer takes on.
'Tax on being poor'
We're not alone in our criticism of premium finance. Matt Brewis, Head of Insurance at the Financial Conduct Authority, recently described premium finance as a 'tax on being poor,' saying: 'Those who are paying monthly are subsidising those who can afford to pay annually.'
However, when we ran some test quotes last November, we found that interest rates alone could add hundreds of pounds to the cost of insurance - with one customer quoted £504 extra for using premium finance.
Find out more:'It's time to get tough with firms'
Which? is calling for the FCA to publish a league table of the best and worst providers of premium finance every six months, with tough punishment taken against those found to be charging unfairly high amounts of interest.
She said: 'Motorists need car insurance to be on the road legally, and the vast majority of mortgage lenders will insist on homeowners having cover - yet those who can’t afford to pay for their premiums all in one go are being penalised with eye-watering interest rates. 'The regulator has been clear - paying for insurance monthly is a tax on being poor, and it’s shocking to see providers still trying to justify the practice. Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually. 'It is now time for the FCA to step up and to get tough with firms that take advantage of customers who can least afford it.'What the insurers say
A spokesperson for 1st Central, which charged the highest rate in our survey, said: 'We understand it is important to customers that we keep the price of insurance as low as possible – and benchmarking tells us that we are competitive for both annual premiums and for those that wish to pay monthly through a credit arrangement. We offer a range of APRs from 5% to enable us to provide credit to as many customers wishing to pay monthly as possible, including those with low or poor credit scores. Over the past quarter, less than 2% of customers paid our highest APR.'
A spokesperson for Co-op Insurance, which had the highest rates for home insurance customers, said: 'Co-op Insurance welcomes this survey analysis from Which? We recognise the importance of premium finance as a product in the insurance industry, giving customers the option to spread the cost of their insurance over the course of a year. Our insurance partner, Markerstudy Distribution, performs regular benchmarking on the rates of credit they offer to our customers. This benchmarking has led us to review these rates, and we are looking to reduce them; we will update our customers on this as soon as we can.'
Some insurers we contacted were unwilling to disclose what interest rates they charge their monthly customers. A spokesperson for Markerstudy - which provides insurance under the Bradford & Bingley, Budget, Dial Direct, Zenith, Geoffrey Insurance and Nutshell brands - said: 'Offering customers the choice to pay for their insurance via premium finance makes insurance accessible for all, particularly in today’s market. We recognise the importance of ensuring the premium finance arrangements provide fair value and deliver good customer outcomes. At Markerstudy Distribution, we perform regular assessments (at least annual) on the rates of credit we offer our customers. We are confident that we have the appropriate governance, oversight and controls in place to ensure our premium finance provides fair value and delivers appropriate customer outcomes.'
Meanwhile, AXA told us: 'We believe that using representative APR provides an inaccurate comparison of the interest rates insurance companies charge to customers for paying monthly. This is because firms calculate representative APR in different ways.' AXA says that, on average, its car insurance customers pay 10% more if paying monthly than they would annually, while its home insurance monthly customers pay 7% more. It said its customers' rates are shown clearly when they choose a monthly option with AXA.
It went on to comment: 'This percentage varies depending on individual circumstances, and a range of factors are taken into consideration. AXA is supportive of any measures that will lead to better customer outcomes and will continue to work with the ABI [the insurance trade body, the Association of British Insurers] and FCA on industry reforms, including those that can help in addressing concerns around affordable insurance premiums for customers.'
The Esure Group - which sells through the Esure, First Alternative and Sheilas' Wheels brands, declined to comment.
Find out more:How to keep costs down if you can't afford to pay annually
Our five tips can help you get the best possible premium and spread payments in an affordable way:
Shop around:Haggle:Consider other forms of credit:Add another driver (for car insurance): Consider 'Black Box' insurance: Find out more:Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665 and is an Introducer Appointed Representative of the following: 1. Inspop.com Ltd for the introduction of non-investment motor, home, travel, pet, van and temporary insurance products (FRN 610689). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN 656479), for the introduction of Pure Protection Contracts, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts. LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386. 3.Which? are an Introducer Appointer Representative of Optimise Media Limited (FRN 313408), for the introduction of HSBC Group, who are authorised and regulated by the Financial Conduct Authority to provide credit brokering activity. Optimise Media is registered in England and Wales to Exchange Street Buildings, 35-37 Exchange Street, Norwich, England, NR2 1DP and company number 04455319. We do not make, nor do we seek to make, any recommendations on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer.
source https://www.which.co.uk/news/article/the-cheapest-and-most-expensive-car-and-home-insurers-for-paying-monthly-arsJH0D1yEsu