Car insurance and APRs: the huge interest rates charged by insurers

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Car insurance APRs
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APRs by insurer
Car insurance - without the interest rates

If you pay monthly for your car insurance, you might be paying a whopping annual percentage rate, or APR.

Here's how it works.

Paying monthly (usually) means taking out a loan for your car insurance

Most of the time, you can pay for your car insurance in monthly instalments or one big go.

Monthly instalments don't work like Netflix or Spotify - it's not a subscription. Instead, it's more like a loan. You get given a full, year-long car insurance policy, and then you pay it back on credit.

And like almost all credit agreements, that means you have to pay interest. And with some insurance companies, those interest rates are huge.

There are hardly any insurance companies that offer 0% APR insurance with monthly payments. But it does exist.

(It also means your insurance is treated like a year-long one in other ways. If you want to cancel it, you'll still have to pay a fee. And your insurance will still usually automatically renew at the end of the year.)

Avoid big interest rates ❗️
Some insurers charge as much as a 40% APR if you pay monthly.

You get credit checked when you pay monthly

As with any loans, most insurance companies will run a hard credit check before they offer you monthly car insurance.

Because it's a hard credit check, it can affect your credit score.

If you have a bad credit score or patchy credit history, they might not offer you insurance. And if they do, you'll probably get a much higher APR.

Paying monthly can affect your credit rating
If your credit score isn't great, you might have to pay more for pay-monthly car insurance.

APRs by insurer

We tested different insurers to check their APRs.

We used the same profile for every quote. It was based on a driver who was:

  • Male
  • 19 years old
  • Driving a manual Ford Fiesta
  • Based in Romford
  • A full licence holder for 1 year

We got the quotes on the 23rd October 2020.

With each insurer, we got two quotes: one based on a single lump sum payment, and one based on monthly instalments.

The price differences were pretty big.

Insurer If we paid annually If we paid monthly Difference
Direct Line £2,513.18 £2,731.9 £218.62
Aviva £2,974 £3,349.88 £375.88
LV £4,712.48 £5,136.60 £424.12
Churchill £5,278.56 £5,806.21 £527.65
Endsleigh £4,397.63 £5,132.91 £735.28
Average £3,975.19 £4,431.50 £456.31

Which works out as an APR of…

Insurer APR
Direct Line 24.10%
Aviva 36.90%
LV 24.90%
Churchill 29.40%
Endsleigh 39%
Average 30.86%

All this means that car insurance APRs are around 10% higher than the average credit card. So it can make more sense to pay for a policy in one lump sum on your credit card. The interest will usually be lower.

Add-ons are more expensive if you pay monthly, too

All those add-ons you can get with a car insurance policy - breakdown cover, loss of keys, uninsured loss recovery - can all be more expensive if you pay monthly, too.

When you add these things to your policy, your insurer bundles the price for them together with the main policy.

If you want to pay monthly for your policy, that means you're credit checked on (and interest is applied to) the whole package, including the add-ons.

So you could end up paying around 30% more for everything on your policy - not just the basic car insurance.

(And you'll usually have to pay fees to cancel breakdown cover separately. Again, it's because you're actually being given a year of cover and then paying it back in credit instalments.)

That said, you can get flexible, pay-monthly breakdown cover, too. And that doesn't tend to involve a credit check. RAC offers one. But it's still more expensive to pay monthly than paying for a whole year in one go.

Fees add to the "hidden cost" of buying car insurance

Interest rates aren't the only unexpected costs insurance companies throw in with the overall cost.

With most companies, you'll also have to pay a lot of different admin fees.

Insurance companies can charge you for:

It's worth checking all the fees before you buy a policy. They can add hundreds to the cost of your car insurance.

So although paying monthly for your car insurance can be a good thing - no need for the big lump sum payment - make sure you do your homework before you sign up with an insurance company. Look out for all those things that can whack up the price, like fees and APRs.

Watch out for fees 🔎
Check your policy documents to find out what fees you have to pay.

Get car insurance without the APR, credit checks or sneaky fees

Here's the shameless self-promotion. 🤭

We're offering pay-monthly car insurance with no credit checks and no APR. You can also cancel it whenever you like without any fees. You'll only have to pay up to the end of that month.

We won't charge you to change any of your details, either. And your price won't go up for no reason at the end of the year. (We'll only change your price if your details change. No sneaky twice-the-price auto-renewals here.)

Sound good? Get a quote and get started today.

Get a fairer policy price
Our new Smart Pricing feature factors how well you drive into your quote and could help you get a fairer price for car insurance! Learn more
Updated on 5th May 2021