High-interest loans: how traditional pay-monthly payments work

When you pay monthly for traditional, out-dated annual policies, you're not actually buying one month's worth of insurance at a time.

You're technically getting a full year's worth of insurance at once. But you're getting it on credit. And the monthly payments you make are like repayments.

And, like most loans, those repayments come with added interest, which makes paying monthly (a lot) more expensive.

It also means your car insurance is treated like a full annual policy in other ways - like cancelling. There's no added flexibility there.

And it means that, like any other time you take out credit, you'll have to go through a credit check.

Plus, a lot of insurers will also charge you a deposit if you want to pay monthly, so you might end up paying a pretty hefty lump sum anyway.

In some cases, the amount of interest is like having a loan with a 40% APR. MoneySavingExpert once listed (the worst offenders.)

But generally, the APR on paying monthly is between 15-35%.

In some cases, it would be cheaper to take out a loan, use that to pay for your car insurance in one annual instalment, and then make repayments on the original loan.

Cancelling your car insurance when you pay monthly

With annual cover paid monthly, your policy is treated like an annual policy when you try to cancel it.

And that's not necessarily a good thing. Here's why.

When you cancel your car insurance, you usually have to pay an admin fee. And then you get a refund on the remaining months on your car insurance.

The fee usually goes up the longer you have left on your policy.

So, if you're paying monthly in this way, your cancellation fee will be based on the number of months left on your car insurance policy until the end of the year. Not the days left before the end of the month.

In other words, your cancellation fee is worked out as if you'd already bought a full year of car insurance. Even though it's actually cost you more because you're paying monthly.

(If you do cancel a pay-monthly car insurance policy, make sure you tell your insurer if your bank details change. Cancelling your direct debit doesn't cancel the policy. It just means your insurer might cancel your policy for non-payment. Which can be pretty bad.)

Paying a deposit for monthly car insurance payments

If you pay monthly for an annual policy with traditional insurers, it usually comes with a pretty hefty upfront deposit. This is usually about 20% of the total price of the policy, with the rest of the payments spread out over the next 10 months or so.

But different insurers will charge different amounts as a deposit. There's no fixed percentage amount.

How paying monthly for car insurance affects your credit score

Whenever you take out credit, you'll have to go through a credit check. And that's no different for these types of old-fashioned car insurance.

When you pay monthly, other insurers will carry out what's called a "hard check" on your credit file. That means other creditors will be able to see that check on your file, and it means your credit score can go down if they decide not to insure you.

If you have a bad credit score, you might get rejected. So you might not be able to pay for your insurance monthly anyway.

Even if you don't get rejected, having a bad credit score can mean your APR goes up. So you could end up paying even more for your car insurance because of your credit history.

Making a claim when you pay monthly, and how it affects your no claims bonus

In most cases, if you make a claim when you pay monthly for car insurance, you'll have to pay for the rest of the year in one lump sum if you want to cancel.

This isn't always the case - and you'd need to speak to your insurer to get the details - but it's pretty common.

You'll also (usually) lose your no claims bonus for the entire year if you have to make a claim.

Again, this is because paying monthly for car insurance doesn't actually mean you buy a month's car insurance at a time. You're buying a full year's insurance, taking out a loan to cover it, and then paying back that loan one month at a time.

Car insurance without the nasty bits

Cuvva hates deposits, interest, tie-ins and hidden fees - it's why we've scrapped them.

Instead, we offer flexible temporary insurance from 1 hour to 28 days.

It's perfect for borrowing and lending - and for experienced or learner drivers alike.

Whatever you're after, it only takes a few minutes to get a quote.