While spreading the cost of an item or service over a year at increased overall cost is common in all industries, on paper it seems like a particularly intelligent approach to car insurance. But although it allows individuals who would not otherwise be able to afford car insurance into the market, the increase in the overall price they pay raises questions about the morality of the offering.

Auto Express reports that many insurers will charge well over 20% APR on insurance premiums if paid monthly. Meanwhile, many banks offer loans at well below 5% APR and many credit cards offer interest-free periods of 12+ months. This would allow savvy individuals to pay for car insurance in full on the credit card and then pay it off monthly at no extra cost.

At present, a huge number of motorists are impacted. GoCompare claims 52% of motorists split their insurance payments over 12 months. This raises the question: who is falling prey to this money-making scheme by insurers? Direct Line made £56m from monthly instalments on home and car insurance in the first six months of 2019 alone.

Most significantly affected are younger drivers. They already face the highest premiums, which can increase by several hundred pounds over the year if they are forced to pay on a monthly basis (due to a typically lower budget removing the possibility of paying in full). This is one of many contributing factors to the rising number who are abandoning learning to drive and waiting until they are older and more financially stable. This ultimately affects their independence, social mobility, and employment prospects as they have to rely on friends and family to drive them around or use public transport.

Targeting the low-income market

Aviva recently launched AvivaPlus, which it stresses will not charge customers any more for paying monthly versus paying annually, nor will it charge any cancellation fees, nor will it increase premiums at renewal any more than it would for an existing customer. This certainly sounds like an excellent idea for young people, especially university students who may not need a full 12 months of cover per year if they spend two thirds of the year at university away from their cars.

However, this does not necessarily solve the problem of the trade-off of annual payments versus monthly payments. AvivaPlus policies have no guarantee of being cheaper than its standard policies due to this added flexibility, but are these just a way of effectively hiding the interest rate? For comparison, Auto Express reported that Aviva charges anywhere between 10.9% and 39.9% APR on its standard car insurance premiums when purchased monthly, although some insurers can charge in excess of 40% APR.

While most things are more expensive if you pay monthly as opposed to upfront, insurance is a unique product. For example, financing a car (to purchase, not to lease) is essentially always more expensive than paying for it outright, as is mortgaging a property. This is the same when buying furniture or electricals on credit from a store. The difference with these goods is that at the end of the payments, the buyer has a physical object of some value that they own outright. Car insurance paid for monthly has no value once it is paid off. It immediately becomes worthless, and must be purchased again or else the policyholder is unable to drive on the road – which in turn effectively makes their vehicle worthless.

It is understandable that insurers would want to charge a little extra on monthly payments; they are providing one year of insurance, with the policyholder agreeing to pay them back. But at a time when so many retailers offer interest-free finance for their goods, customers could feel that insurance is falling short of the services they are offered in other sectors. And as car insurance is mandatory, for individuals on lower incomes the only alternative to paying monthly is not driving at all. This opens insurers up to accusations of exploiting those on lower incomes.

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