Car insurance: pay upfront to avoid interest hit

Faced with a whacking great annual insurance premium, many of us are tempted by the option to pay monthly. Indeed, for many of us, this is the only way to afford cover – finding what can often be a four-figure sum to pay for the policy simply isn’t feasible. But if you opt for instalments, rather than a one-off payment, the chances are the premium will be bigger. Insurers charge interest on what is effectively a loan that you are repaying over 12 months, so a £1,000 premium could end up costing you £1,150 or more once the charges are taken into account. So, if you can afford to pay in one go, it’s the better bet in the long term.

Facts and figures

We analysed almost 24 million car insurance quotes in 2012 and found just under half of motorists (48 per cent) choose to pay for their insurance monthly, at an average cost of £621 a year. However, drivers who pay for their insurance once a year are spending an average £532 – or £89 less. This means drivers paying monthly could collectively save £1.6 billion a year simply by changing the way they pay. Interestingly, the analysis also reveals that those who pay monthly do so because they typically have higher premiums. It’s common sense, really: on average, those who pay monthly have an annual cost 24.7% higher than those who choose to pay yearly. Clearly, upfront cost is a deciding factor for those opting for more manageable monthly payments.

Cutting the cost

Running a car certainly isn’t cheap, so it’s worth exploring every potential cost-saving tactic to bring down the core premium – and maybe remove the need to fund a monthly payment scheme. Here are a few ways to save: Shop around – never automatically renew with the same insurer. Always use an online search facility such as MoneySupermarket to find the most competitive quotation Increase your excess – raising the excess (the amount you pay towards any claim you make) will lower the premium. Just remember to keep the excess affordable! Boost security – the more protection your car has, the lower the premium should be, especially if you can park off-road overnight Drive a lower-risk car – insurers allocate all cars to one of 50 insurance groups, with those in Group 1 being the cheapest to insure. If you’re changing car, you might want to take this into account.

Give yourself some credit

If you have no choice but to pay monthly, and you can’t find the deal you want from one of the few insurers who offer interest-free instalments, you could consider using a credit card that doesn’t charge interest on purchases for a given period. For example, the Tesco Bank Clubcard Credit Card charges 0% on purchases for 16 months, so you could put the premium on the card and then spread the cost, effectively paying monthly without the additional interest. There are a number of zero per cent purchase cards on the market, so if you are eligible, you’ll only pay for the original price of your policy, although your insurer might levy a small fee if you pay via a credit card. Be warned, though. If you choose to pay using this method, you will need to be disciplined and pay the premium off in full within 12 months, otherwise you’ll still be paying for one policy when your new one kicks in. If you head over to our credit card pages, you can see what’s on offer.

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