Which? has warned UK drivers who buy cover monthly that they could end up paying hundreds of pounds more than those who pay for policies annually.

The consumer group used data from the comparison website GoCompare.com to find the average difference between prices paid by annual and monthly customers between December 2018 and September 2023.

In September 2023, those paying monthly for an annual policy faced paying around £309 more on average over the year than those paying in one go, according to the research.

In response, Which? called for "an action plan to tackle the unfair costs of paying monthly for insurance."

Their research found the following:

  • The average annual cost of monthly payments was £892, while the cost of paying annually in one go was £583.
  • In September 2022, the average gap was £251 (£738 for monthly payments versus £487 for paying annually).
  • In December 2018, the typical gap was £207 (£460 for paying annually versus £667 for paying monthly).

Which? said younger motorists - who often pay the highest premiums - are more likely to pay monthly.

The consumer group said the Financial Conduct Authority (FCA) should set out an action plan, including assessing how much it costs for firms to provide credit on premiums and naming and shaming those charging the highest rates.

The FCA should take action against any firms that are charging monthly customers excessive interest rates by June 2024, Which? urged.

Rocio Concha, Which? director of policy and advocacy said to PA: “Car insurance is a legal requirement for motorists – and yet those who can’t afford to pay in one go annually are often being penalised through unjustifiably high interest rates on their monthly repayments.

“That isn’t right – and it’s now up to the financial regulator to outline an action plan to tackle the unfair costs of paying monthly for insurance.

“The FCA must monitor the issue closely, publishing an analysis every six months of firms’ rates, naming and shaming the worst providers.

“The regulator should also assess how much it costs firms to provide premium credit and shouldn’t hesitate to take action against providers charging monthly customers excessive interest rates.”

A spokesperson for the Association of British Insurers (ABI) said: “Our members are acutely aware of the pressures many households are currently facing and the impact recent increases in premiums – due to significant cost pressures outside of their control – are having on motorists.

“Paying premiums by monthly instalments is one option motorists have to manage their budgets. Premium finance is one of several topics we continue to discuss with our members and the FCA when considering possible measures that could help customers best manage their insurance costs.

“More widely, we’re working with industry bodies such as the Society of Motor Manufacturers and Traders (SMMT) and Thatcham Research to understand areas of shared concern between manufacturers and motor insurers, such as vehicle safety and security.”

Insurance is based on pricing the risk of claims being made and the costs of those claims, and ABI data indicates that for drivers aged 18 to 20 and 86 to 90, the frequency of claims and the average cost of claims is higher, which can affect premiums.

Insurers use several factors when setting the price for motor insurance, including the type of vehicle, where it is kept and the driver.

“We also expect firms to continue to support customers in financial difficulty"

In the third quarter of 2023, the average price of motor insurance was a record £561, an increase of 29% compared to the same time in 2022, according to recent figures from the ABI.

Specialist brokers may be able to help people who are finding it hard to get insurance. The British Insurance Brokers’ Association can help to put people in touch with a specialist broker.

An FCA spokesperson said: “We have already told firms they must ensure their products provide fair value, including for customers paying monthly. Where we see products that don’t offer fair value to consumers, we will take action.

“We also expect firms to continue to support customers in financial difficulty and reflect on whether they can do more to support people with lower financial resilience, in line with our guidance.”