Consumer group Which? has warned that drivers who cannot afford to pay their annual premium upfront are being hit with what campaigners describe as a “poverty premium” – effectively paying extra simply because they need to budget month by month.
The warning comes as separate research reveals that nearly two-thirds of insurance customers would be forced to cut cover, downgrade policies or even sell their car if monthly payment options disappeared.
The hidden cost of paying monthly
While many drivers assume paying monthly is simply a convenient way to spread costs, experts say it often works more like a loan.
Which? found some insurers are still charging annual percentage rates (APRs) of up to 29.9% for customers who choose to pay in instalments rather than upfront.
That means motorists can end up paying substantially more for exactly the same insurance policy.
Rocio Concha, Director of Policy and Advocacy at Which?, said: “Millions of motorists rely on monthly payments to afford essential car insurance cover, yet many are still being charged interest rates comparable to an expensive credit card.”
Which? found some providers have reduced rates compared with two years ago, when APRs above 35% were still being charged, but argues progress remains too slow.
Why drivers feel they have no choice
The problem is particularly acute because many households simply cannot afford to pay hundreds of pounds upfront in a single payment.
New research from Premium Credit found that 64% of insurance customers would reduce their level of cover or switch to cheaper policies if monthly payment options were unavailable.
More than one in five motorists (22%) said they would consider selling their car altogether if they could not spread the cost of insurance.
The study also found that 24% of customers have switched from annual payments to monthly payments during the past year, highlighting the growing financial pressure facing households.
Mona Patel from Premium Credit, said: “Insurance customers very much value being able to pay for cover monthly and it is clear that not being able to do so would have a major impact.
“The research shows people are increasingly switching to monthly payments for car and home insurance.”
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Why more drivers are switching
Rising living costs and higher insurance premiums have pushed many motorists towards instalment plans.
According to Premium Credit’s research, 13% of drivers are even planning to increase their level of motor insurance cover in the coming year, despite ongoing financial pressures.
Dave Taylor, Chief Customer Officer at Somerset Bridge, said: “Customer payment preferences have changed over the last five years with more customers using premium finance, linked both to rising motor insurance premiums and wider economic pressures affecting disposable income.”
What drivers should check before renewing
Consumer experts recommend motorists compare not only the headline insurance premium but also the APR charged for paying monthly.
A policy that appears cheaper at first glance can sometimes become more expensive once interest charges are added.
Drivers approaching renewal should:
- Compare the total annual cost, not just monthly payments
- Check the APR before agreeing to pay monthly
- Consider whether paying annually could save money overall
- Shop around rather than automatically renewing
- Review whether their level of cover still meets their needs
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The growing ‘poverty premium’
The findings reignite concerns that those least able to afford large upfront payments are often charged the most.
While monthly payments provide crucial flexibility for millions of households, consumer groups argue that drivers should not face credit-card-style interest rates simply to access a legal requirement.
With car insurance remaining mandatory for motorists, the debate over whether monthly payment charges are fair is likely to intensify as household budgets remain under pressure.
