Consumer group Which? has raised concerns over insurers charging annual percentage rates (APRs) comparable to credit card lenders for customers opting to pay for cover in monthly instalments.
High APRs on monthly payments
A recent investigation by Which? has revealed that some car and home insurers are applying high APRs to customers who choose to spread their insurance payments over the year.
According to the study, the average APR for car insurers charging for monthly payments stood at 22.84%, while for home insurers, the average was 21.59%.
Which? surveyed 52 car insurers and 46 home insurers, asking what interest rates they applied to monthly payments.
- 41 car insurers disclosed their rates, with just three stating that they do not charge extra for monthly instalments.
- 38 home insurers disclosed their rates, with 19 confirming that they do not charge.
- Some insurers did not respond to the request.
Interest rates comparable to credit cards
While APRs varied across different insurers, some were found to be at or above 30%, putting them in line with credit card lenders.
As of late February 2024, the average purchase APR for a credit card was 35.42%, with many card providers charging less than this.
Insurers face less risk than credit card lenders
Which? has criticised these high interest rates, arguing that the risk to insurers is much lower than for credit card lenders.
Unlike credit card companies, which must recover debts through legal means, insurers have the option to terminate a customer’s policy if they fail to pay.
With over 20 million people estimated to pay for their insurance in instalments, the issue is affecting a significant portion of UK consumers.
Research by the Financial Conduct Authority (FCA) suggests that 79% of adults in financial difficulty have used the monthly payment option for insurance.
Calls for fairer pricing
Rocio Concha, Which?’s director of policy and advocacy, has called on insurers to ensure that monthly payment charges remain fair:
“People often don’t pay for car and home insurance in monthly instalments out of choice, but financial necessity.”
Many households, particularly those already struggling financially, rely on monthly payment options to afford essential insurance policies.
Industry response and FCA investigation
The Association of British Insurers (ABI) acknowledged the concerns, stating that monthly payment options are important for consumers managing their budgets.
A spokesperson for the ABI commented:
“We understand how crucial it can be for consumers to have the option to pay monthly, so they can manage their insurance costs.”
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However, they also pointed out that insurers incur costs when offering monthly instalments and must account for those in their pricing.
The ABI introduced Premium Finance Principles last year, setting guidelines to ensure that any additional charges for monthly payments are fair, transparent, and reflective of costs.
“We will continue to work with our members on this matter and look forward to learning more from the FCA on its review.”
FCA’s market study on pricing practices
The FCA is currently conducting a market study into pricing practices within the insurance industry.
This review will examine whether insurers are charging fair interest rates on monthly instalments and ensuring transparency in pricing structures.
The findings could lead to regulatory changes or guidance for insurers, ensuring that consumers are not unfairly penalised for spreading their payments over time.
Consumer advice
For those concerned about high APRs on monthly insurance payments, Which? has advised consumers to:
- Compare APRs before choosing a monthly instalment option.
- Consider paying annually if financially feasible to avoid interest charges.
- Check for alternative payment plans with lower fees.
- Contact insurers directly to negotiate better terms where possible.
Conclusion
With millions of UK consumers relying on monthly payments to afford essential insurance, the issue of high APRs remains a significant concern.
The FCA’s ongoing market review, alongside continued pressure from consumer groups like Which?, may lead to reforms ensuring fairer pricing and greater transparency in insurance payment structures.
