A study by price comparison website Go Compare – you know, of ‘opera singer in dubious locations’ fame – has shown that as many as 20 million people are trapped in a ‘vicious circle’ when paying for insurance cover.
First, let’s ask a question: How do you pay for your car or home insurance?
When you purchase your insurance, you’re usually given two options – pay the bill in full annually, or pay monthly instalments.
If you pay annually, you’re probably not paying out a fortune for them (well, relatively). See, the problem comes for those who choose to pay car and home insurance cover on a monthly basis. Go Compare reported that drivers pay out an additional £144 when paying monthly; homeowners and tenants are hit with an extra £113 for monthly home insurance.
And that, of course, that means the system is whacking poorer households who can ill-afford an annual lump sum pay-out. In fact, the study shows one shocking example, where standard car insurance was offered for £498 – but sky-rocketed to £597 when paying monthly. So, that’s £99 on your insurance bill before you’ve even started.
You can thank interest rates for that. Just a casual look will show companies like RAC and Swinton charging car insurance interest rates at 29.99% and 35.6% respectively. For home insurance, the figures can shift from Tesco’s fairly reasonable (though still outlandish) 29.8% to Endsleigh’s colossal 44.1%. All because you pay monthly for cover.
Discussing the report, Georgie Frost from Go Compare said:
‘If you pay monthly for your insurance, you will almost always end up paying more. Remember – when you pay monthly you’re not really paying for your insurance, you’re paying back a loan that comes with interest charges. Not only will you pay more because of that credit, but our research shows that you are less likely to switch in future if you pay monthly, and that could end up costing you even more each year.’
Indeed, the study revealed that while just 29% of higher earners choose monthly car insurance payments, almost half (47%) of lower income drivers choose this method. Figures for monthly home insurance payments show largely similar percentiles: 53% of poorer households choose this payment plan vs 33% of higher earners.
And, going against all financial advice, monthly payers are also far less likely to switch suppliers and providers – an act that could save households a considerable amount of money. One-third of those paying monthly don’t even shop around for the best deal.
Dr Joe Gladstone, academic researcher in consumer behaviour at University College London, analysed the results on behalf of Go Compare. According to him, those facing difficulties with their finances are ‘far less likely to engage with their financial matters, read their bills or shop-around. As a result, paying monthly for insurance can lead to a cycle of paying more.’
Thankfully, even if you can’t afford to pay annually for your car or home insurance, there are ways to keep the costs down. One method, advocated by consumer Which? is to challenge any insurance quotes you receive while renewing. Companies are generally keen to keep hold of their existing customers, so you may be able to get a better deal by not accepting their initial offer.