(This article is about the - often massive - price differences between paying for your car insurance monthly rather than annually. We don't think that's fair. That's why we're building a pay-monthly car insurance with no interest, no deposit and fee-free cancellations. Interested? You can sign up for the waitlist now, and be the first to know when it's ready.)
When you buy (most) car insurance policies, there are two ways you can pay: annually or monthly.
If you pay annually, you pay the whole thing in one lump sum.
If you make monthly payments, you'll set up a direct debit.
Paying monthly can be convenient. (Means you don't have to get together a massive lump sum.)
But paying monthly for car insurance is also more expensive than paying annually. And that's because you're basically taking out a very high-interest loan.
Sometimes, the price difference between annual and monthly payments can be huge. And all that adds to the cost of your car insurance, which tends to be pretty pricey in the UK anyway.
(So we're clear: paying monthly for a long-term car insurance policy isn't the same as getting temporary car insurance for a month. Temporary car insurance works very differently.)
When you pay monthly for car insurance, 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 on a loan.
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.
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.
(More on those things later.)
In some cases, the amount of interest is like having a loan with a 40% APR. (MoneySavingExpert 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.
Even though your payments are monthly, your policy is technically a full annual one. And that means it's treated like an annual policy when you try to cancel it.
But 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, 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 monthly for your car insurance 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.
Whenever you take out credit, you'll have to go through a credit check. And that's no different for car insurance.
When you pay monthly, your insurer 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.
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.
None of this is very fair on customers who can't afford to pay for their car insurance up-front. And that's why we're working on a new kind of pay-monthly car insurance.
Ours doesn't work like a loan. Instead, think of it more like a subscription - a Netflix or Spotify for car insurance.
If you want to cancel, you'll be able to do it in the app in seconds. There won't be a fee. You'll just have to pay till the end of that month.
There won't be a deposit, either, or an interest rate. Just simple monthly payments that you can pause or cancel whenever you like.
Interested? Sign up for the waitlist, and we'll let you know when it's ready.