Revealed: Why you should NEVER pay for insurance monthly

Why you should NEVER pay for insurance monthly
Why you should NEVER pay for insurance monthly

More than a third of drivers pay for their car insurance in monthly instalments, while 44% of Britons with home insurance spread the cost of their cover over a 12-month period.

But while paying monthly allows you to avoid making a large, one-off payment, most insurers impose fees and interest charges that mean you pay more overall.

See also: Drivers hit by £100 car insurance hike

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Research from GoCompare Insurance shows that the fees and charges made by one insurer charging a fairly typical annual car insurance premium of £498.06, increased the total cost of cover for someone paying monthly to £597.41 – or 20% more.

Georgie Frost at GoCompare said: "If you pay monthly for your insurance, you will almost always end up paying more because you're paying back a loan that comes with interest charges."

Why people pay monthly

The main reason people choose to pay for insurance monthly is simple: they can't afford to pay the annual premium in one go.

That's why paying monthly is so much more common among people on lower incomes.

GoCompare's figures reveal that half of drivers from poorer households pay monthly for their car insurance, compared to just 29% of those from the highest earning groups.

Many monthly payers are therefore trapped in a vicious circle that means they end up paying more simply because they cannot afford to pay less, in one go.

How to avoid paying more for insurance

If you can afford to pay out a lump sum for your car or home insurance once a year, then paying annually is a no brainer.

But what if you can't raise the cash to do this? The good news is that you still have options.

You could, for example, escape the cycle by using a savings account to put away the amount you need to renew your insurance when the time comes.

Say your premium is around £400 a year, saving between £30 and £35 a month should provide you with enough to cover it 12 months down the line.

Benefits of this approach include that you will receive interest - there are a number of 12-month Regular Savings accounts paying 5% on regular investments of this sort of level.

You might also find yourself with more cash than you need at the end of the year if you shop around for a better deal rather than simply renewing with your existing provider.

Another option if you need to take out insurance now and have no time to save the cash is to apply for a 0% credit card, use it to pay for your insurance and then set up a direct debit that will clear the balance over a 12-month period.

This should work out cheaper than choosing to pay your insurer monthly. Just remember that using the card for any other purpose, or failing to clear the balance within the interest-free period, could land you in deeper financial trouble.

Whatever you do, it always makes sense to get online and compare the renewal deal you are offered before accepting it.

Insurers rarely reward loyalty, so you are likely to find a cheaper deal elsewhere.