Spreading your car insurance goes direct to your wallet

Car insurance premiums are racing away to an all-time high with average annual costs now at £822. You need insurance if you want a car – and most of us want and need a car so we have to pay up.

It’s no surprise that millions of us choose to spread our payments by paying monthly on direct debit. That means you don’t have to find £822 in a hurry to make sure your car is safe – and legal – to drive. And it means you have peace of mind that insurance is sorted for the year with the premiums going out your bank account.

Sounds like a good idea? Well yes up to a point and the point is that motor insurers will charge you for the cost of convenience.

MoneyExpert.com shows what your options are…

Go direct

Paying bills by direct debit is usually a good idea with many firms such as power companies offering discounts. And direct debit has big advantages

  • It’s simple, safe and convenient allowing you to spread the cost
  • You have the right to cancel a payment and are protected by the Direct Debit Guarantee which means mistakes by banks or providers have to be refunded
  • It takes the hassle out of payments – you don’t have to go to the bank or write out a cheque to make a payment
  • And payments are made automatically so you don’t miss payments and run the risk of fees or penalties

Direct cost

Motor insurers however charge you for the cost of paying by direct debit and the average across the industry is as much as 22 per cent extra. That can add more than £180 to the annual cost of your motor insurance – and that’s a lot to fork out on top. Firms either charge a fee or an interest rate but it amounts to the same in the end – the 22 per cent is the extra you’ll pay.

Only around one in 12 motor insurers do not charge for the convenience of direct debit.

When you buy motor insurance ask your firm what the charges are for spreading the cost with direct debit.

Insurers say…

When you get insurance for a year and have only paid one month’s money insurers argue that you are getting a loan. They say that because you are insured for the year but have only paid one month’s money that you should pay interest on what is effectively a loan.

If you get insurance on your £12,000 Ford Focus and then write it off the next day the insurer will pay out the full cost even if they’ve only had one month’s premium.

That might sound fair enough – although not all firms charge the same and loan rates across the industry are not as high as 22 per cent.

Don’t be beaten

You don’t have to pay the insurer’s 22 per cent interest rate. There are other ways to borrow the money. Not all of us – or even many of us – can afford £822 straight away just to pay the insurance.

But stumping up an extra £180 might stick in the throat so how do you keep your costs down?

Plastic or loan

Taking out a bank loan for a year to pay your insurance doesn’t make sense – rates on smaller amounts such as £822 are generally higher and the same applies for loans over 12 months.

Credit cards however do offer the opportunity to cut your costs on your motor insurance. Even a standard card charging around 16 per cent is cheaper than some of the direct debit rates on offer.

But if you can get a card with a special introductory offer such as 10 months interest-free on purchases you can save money.

Make sure though you pay off the money you borrow before the end of the special offer or you’ll pay interest!

Compare 0% purchase rate credit cards

Notes

£822 average car insurance premium based on research by the AA September 2007

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