If you're paying for your insurance in monthly instalments, it may end up costing you much more than you'd anticipated. We explain how to keep the cost down.
When you take out an insurance policy you’ll often be given the option to spread the cost by paying monthly rather than forking out the full whack in one go. Although this can make paying for your insurance easier on your wallet to begin with, spreading your payments over the year can often mean you end up paying more overall.
From the insurance provider’s point of view, allowing you to pay for your policy monthly is the same as loaning you the money for your insurance premiums and getting you to pay it back over the course of the year.
As such, providers will often charge interest on your payments, which can be as much 30%. In this way you could end up paying siginificantly more for your insurance than you have to if you decide to pay monthly.
For example, say your car insurance policy costs you £300 when you pay up-front. Though that may be a lot to part with all in one go, a policy paid for in 12 instalments with a monthly rate of 29.99% APR would cost you £29.24 every month, adding up to £350.94 overall – that’s an extra £50.94 simply for the privilege of spreading your payments.
What can I do about it?
First of all you may want to consider paying for your insurance policy in full when you first take it out. This completely eliminates the problem of interest being added to your payments so it’s a good idea if you can afford to do so.
However this option often just isn’t practical. As such if you do decide to spread the cost of your cover by paying in monthly instalments, it’s important to factor in the amount of interest you’ll be charged on top of the quoted premium when you compare different policies.
What else should I consider?
It’s worth noting that not every insurance provider will charge interest if you choose to pay your premiums monthly. Some allow you to spread your payments over the year without paying anything on top of the amount you were quoted, so these are worth looking at if you need to pay monthly.
However, bear in mind that it’s not a given that providers who don’t charge interest on your monthly payments will work out cheaper overall or provide you with the most suitable cover.
As such, if you find a policy that allows you to spread your payments without charging interest, you shouldn’t automatically assume that it’s going to provide you with the cheapest cover available. Instead it’s in your interest to compare your interest-free quote with quotes from providers who do charge extra.
The best way to get the right cover at the right price is to compare the premiums you're quoted by providers that don’t charge you interest for paying monthly with the total cost of cover (the quote for cover plus interest) quoted by providers who do charge extra.
That said, you shouldn’t just focus on price alone. As well as comparing ’total cost’ quotes to find out which policy is cheaper, you’ll also need to compare the level of cover offered by the different policies. This is the only way to determine which insurance policy will provide you with good value for money as well as the cover you need.
