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Annual vs monthly car insurance

Should I pay monthly or annually for car insurance?

Paying annually for car insurance might mean a bigger initial payment, but it does work out cheaper - here's why

By Jessica Bown

Published: 03 September 2021

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Should I pay monthly or annually for car insurance? 

Most insurers will allow you to pay for car insurance in one of two ways: with a lump sum payment that covers the next 12 months, or in 12 (or sometimes 11) monthly instalments. 

If you choose the pay-monthly option, you are essentially taking out a 12-month loan with the insurance company. As such, you will pay interest on the amount borrowed, which will increase the total amount you pay for your car insurance. 

Annual premiums can generally be paid by credit or debit card. But to pay monthly, you’ll have to make an initial payment and set up a direct debit for the remaining payments. It’s then your responsibility to ensure there is enough money in your account to cover these payments, as failing to do so could lead to your cover being stopped and could also damage your credit score.

The short answer is therefore that it’s cheaper and easier to pay annually for car insurance when you can.

Is it cheaper to pay monthly or annually for car insurance?

If you can afford to pay for your car insurance in one go, that is almost always the cheapest option. That’s because, by paying a lump sum upfront, you avoid entering into a credit agreement that involves paying interest on the premium calculated by the insurer. 

MoneySuperMarket data indicates that a typical motorist can save more than £200 by paying annually, with some drivers – such as 17 to 24-year-olds – looking at much larger savings because their premiums are so high. Yet almost half of the people who take out car insurance with MoneySuperMarket choose monthly payments.

 

Payment term requested

Average annual cost

Percentage

Monthly

£747.46

49.1%

Annually

£517.61

50.9%

Based on fully comprehensive policies for single drivers holding a full UK licence. MoneySuperMarket data, collected between January and June 2021 (accurate as of August 2021)

Paying monthly for car insurance: the pros and cons

The main advantages of paying for car insurance monthly are:

  • You can spread the cost of cover over the course of the year
  • You can avoid buying car insurance putting strain on other areas of your budget
  • You may be able to improve your credit score if you stick to the repayment plan (although having a low score often means paying even more for cover)

The main disadvantages are:

  • You will pay more for cover than you would if you paid annually
  • Your application credit check will show up on your credit file
  • You will further damage your credit score (and could end up without insurance) if you miss one or more payments

Paying annually for car insurance: the pros and cons

The main advantages of paying for car insurance annually are:

  • It is cheaper, as there is no interest to pay
  • Paying annually means most insurers only run a soft credit check (that leaves no mark on your credit report)

The main disadvantage is that you’ll have to stump up the whole premium in one go.

Do I have to pay a deposit when I take out car insurance?

Effectively, yes. You can’t take out car insurance without making a payment of some kind. If you choose monthly payments, you will generally have to make a larger first payment of between about 15% and 25% of your total premium, with the remainder split equally over the next 10 or 11 months. 

Some providers market their pay monthly car insurance policies as “no deposit car insurance”. But this simply means the total cost is split equally over the 12 months of the policy term. You will still have to make the first, albeit potentially smaller, payment to get insurance.

Does paying for car insurance monthly affect my credit score?

A pay monthly car insurance contract involves entering into a credit agreement under which you agree to pay a certain amount each month. It therefore involves a credit check that will show up on your file. Too many checks of this kind can have a negative impact on your credit score – as will failing to make any of the agreed repayments on time. 

However, if you make all the repayments, this could help to boost your score, especially if it is quite low. You can check your credit score for free, and find out more ways to improve it, via MoneySuperMarket’s Credit Monitor service.

Can I get car insurance with a poor credit rating?

Your credit score is more likely to affect your application for pay monthly car insurance than for insurance you buy via an annual premium. This is because the provider is essentially setting you up with a 12-month loan, so it will run a full credit check on you to investigate your financial situation and likelihood of making the monthly payments on time. 

So if you have a low credit score, it may up the amount the provider wants you to pay in interest – thereby further increasing the cost of your insurance. If you have a very low credit score, you could even be turned down altogether.

How can I reduce the cost of car insurance? 

Paying monthly for car insurance reduces the initial outlay you have to make but increases the cost overall. There are ways to cut the cost of car insurance, though. These include:

  • Agreeing to pay a higher voluntary excess towards any claims
  • Choosing a car in one of the lower insurance groups
  • Taking out fully comprehensive cover, which is often cheaper than third party only policies
  • Considering specialist car insurance such as telematics cover or pay-as-you-go policies
  • Shopping around for the best deal – each and every year

Compare car insurance quotes

However you pay for car insurance, to get the best deal it’s vital to shop around every year, rather than simply accepting your existing insurer’s renewal quote. You can find great deals that suit your needs from a range of providers quickly and easily with MoneySuperMarket. 

Just tell us a bit about you, your car, and the type of cover you want, and we’ll show you a list of suitable quotes to compare. When making your choice, you can switch between annual and monthly payments to see what difference it makes to the cost of the policy you are considering.

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