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Millions of people are caught in ‘vicious circle of monthly insurance payments’

09 October 2017

Monthly payers are far less likely to switch than annual payers, and are being charged more for the privilege

People who pay for their insurance monthly rather than annually are up to 33% less likely to switch provider, according to research from GoCompare Insurance.

As a result of not switching, they are paying on average £144 more for car insurance and £113 more for home insurance.  However, the findings are potentially just the tip of the iceberg for monthly payers.

The research involved 5,000 people digging out their bills to help understand why some people switch and others don’t.

According to the research, 38% of drivers pay for their car insurance by monthly instalments, while 44% of householders pay for their home insurance monthly.  That’s potentially 7.6m car insurance policies and 11.5m home insurance policies with monthly premiums.

However, the study also revealed a key split in the make-up of the monthly paying group, based on household income.  Almost half (47%) of drivers from lower income households pay monthly for their car insurance, compared to just 29% of those from the highest earners.  Similarly, 53% of lower income households pay monthly for their home insurance, compared to 35% from the highest earning groups.

It is this aspect which is most concerning.  While paying monthly helps spread the cost of insurance, monthly payers tend to pay more in total as a result of instalment fees and interest for the credit.  As a result, many monthly payers are trapped in a vicious circle caused by sticking with a bad deal and then paying more in fees and credit for the privilege.

According to one example found by GoCompare Insurance, a fairly typical annual car insurance premium of £498.06 turned into a total cost of £597.41 when paid monthly.  That’s an additional £99 – a 20% increase – simply for paying monthly.

Why do monthly payers switch less and pay more?

Dr Joe Gladstone, academic researcher in consumer behaviour at University College London, said: “We already know that hassle is a big factor behind why people don’t switch.  People paying monthly may see having to cancel a direct debit and set up a new payment as an additional hassle.  Equally, if you pay a smaller amount monthly, you are likely to be less price sensitive than if you were to pay the full amount in one go.

“Critically though, the answer could be to do with financial distress.  Those experiencing financial distress are far less likely to engage with their financial matters, read their bills or shop-around.  As a result, paying monthly for insurance can lead to a cycle of paying more.”

How to break free from the monthly insurance trap

  • Be aware of the costs involved with paying monthly.  While it spreads the cost into manageable chunks, it isn’t free.  GoCompare displays exactly what you will pay for each policy if you choose to pay monthly and also allows you to rank results by the instalment total;
  • Could shopping around and switching reduce the overall cost of your insurance?  As always, the easiest way to bring down the cost of your insurance is to switch to a better deal;
  • Do you still need to pay for your cover monthly?  Many people opt for monthly payments when they first start paying for insurance.  It is worth reviewing if you really need to pay that way now;
  • If you need to spread the cost of your insurance consider taking out a 0% purchase credit card and set up a direct debit that will clear the total payment over the 12 month term of the insurance.  Overall this will work out cheaper than paying the fees and interest charged by insurers.

Georgie Frost head of consumer affairs at GoCompare, said: “If you pay monthly for your insurance, you will almost always end up paying more.  Remember - when you pay monthly you’re not really paying for your insurance, you’re paying back a loan that comes with interest charges.  Not only will you pay more because of that credit, but our research shows that you are less likely to switch in future if you pay monthly, and that could end up costing you even more each year.”

- ENDS -

Notes to editors:

* Populus carried out the research on behalf of GoCompare. Populus interviewed a nationally representative sample of 5,000 online respondents aged 18+ in Great Britain between 16 and 21 May 2017

** According to the ABI, in 2013 there were 20.1m car insurance policies in the UK.  If 38% pay monthly, that’s 7.6m.

*** According to Office for National Statistics (ONS) in 2011, there were 26.3m households in the UK.  If 44% pay monthly, that’s 11.6m.

**** Source: GoCompare - a car insurance quote for a male aged 49, living in Norwich, driving a Mazda CX5.