Motorists opting for monthly insurance payments could be hit with interest rates as steep as those on credit cards, with some facing nearly 40% APR, consumer watchdog warns
Motorists opting for monthly insurance payments could be hit with interest rates as steep as those on credit cards, with some facing nearly 40% APR, consumer watchdog Which? has warned.
The investigation by Which? also revealed that home insurance customers aren’t faring much better, with some providers charging close to 35% APR for those spreading their payments across the year. Which? highlighted that the interest rates slapped on monthly insurance premiums are starting to mirror those associated with credit card debts.
In the survey Which? rinterviewed 39 car insurers and 34 home insurers to inquire about the APRs for monthly instalments. Many insurers did not disclose their APR.
Among those that did, Which? found that 1st Central charges between 5% and 39.11%. It gives customers a personal interest rate after a credit risk assessment, Which? said. Out of the 27 insurance providers that charge interest and were willing to disclose their rates, the average APR was found to be 23.37%.
Only two car insurance firms NFU Mutual and Hiscox confirmed to Which? that they do not impose any interest on monthly payments. Responding to the findings, 1st Central told Which?: “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.”
They further justified their varied APR range: “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.”
Insurer 1st Central pointed out that customers often focus on the total monthly cost, where it can be highly competitive. For home insurance, the Which? study found the highest rate came from Co-op Insurance, with customers paying between 31.31% and 34.75% APR on monthly payments. The average across the providers was 23%.
In response to the findings, Co-op Insurance said they are working to reduce rates where possible. A spokesperson 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.”
The company revealed that an insurance partner conducts regular benchmarking tests, which has prompted a review of these rates. They added: “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.”
Co-op Insurance also cited their commitment to transparency, stating they had taken such an approach when responding to Which? throughout their investigation.
Fifteen home insurance providers, including big names like Bank of Scotland, Halifax, and Hiscox, have been identified as not charging interest on their policies. Which? highlighted that, as of January this year, the average credit card rate hit 34.8%, with most cards imposing rates of up to 25%.
Which? has pointed out that insurers face less risk compared to credit card companies because the credit offered is tied to the insurance policy sale, and non-payment can result in policy cancellation. Since January 2022, motor and home insurers are under an obligation to ensure their products offer fair value, a requirement that’s been bolstered by the Financial Conduct Authority (FCA)’s Consumer Duty introduced last year.
Which? is calling on the regulator to devise an action plan ensuring firms provide fair value in the interest rates they charge, and has suggested the FCA create a league table ranking providers.
Rocio Concha, Which? director of policy and advocacy, has urged the FCA to “step up and to get tough with firms”. In response, a spokesperson for the Association of British Insurers (ABI) commented: “Our members understand how important access to appropriate insurance is for their customers and are very aware of the financial pressures households are currently under.”
“Paying premiums by monthly instalments is an option they offer to help customers manage their budgets. The cost of premium finance is one of a number of topics we continue to discuss with our members and the Financial Conduct Authority.”
A spokesperson for the FCA said: “Premium finance helps people to spread the cost of insurance. We have made it clear to industry they need to ensure people are getting fair value from it.”
