According to recent research, individuals who pay their car insurance in monthly installments instead of a single lump sum are being subjected to an interest rate of over 30%. This has been criticized by activists as a form of “poverty premium”.
Customers are provided with the option to pay their insurance premium in one lump sum annually or to divide it into smaller payments throughout the year.
Although the monthly installments may be less, the overall expense is often greater because the premiums are considered a loan and insurers tack on an interest rate to the payment.
According to a study conducted by consumer group Which?, the interest rates for premium financing varied between 20.50% and 36.33%.
1st Central, the insurer, implemented a policy with a 36.32% interest rate for 18-year-old drivers. This resulted in an additional £504 added to their yearly premium of £3,388.
The insurance company informed Guardian Money that they offer rates ranging from 33.50% to 39.11%, yet their policies are frequently listed as some of the most affordable on comparison websites.
The financial regulator has suggested that it may prohibit this practice. In a conversation with the trade publication Post, Matt Brewis, the head of car insurance at the Financial Conduct Authority, stated that premium finance is an inadequate product and expressed full agreement with those who believe it contributes to a poverty premium.
According to Martin Coppack, the head of Fair By Design, a group advocating for fair pricing, there are two distinct markets: one that benefits those who are well-off and healthy, and another that disproportionately harms those who are poor.
A car is a necessity for many individuals with low incomes, and owning a car also requires having car insurance in order to comply with the law. However, studies reveal that those who are financially disadvantaged end up paying higher rates for car insurance.
The director of policy and advocacy at Which?, Rocio Concha, urged the FCA to provide a plan of action to address the inequitable expenses associated with monthly insurance payments.
She stated that the regulator must also evaluate the expenses incurred by companies in offering premium credit and should not hesitate to intervene if providers are charging unreasonable interest rates for monthly customers.
1st Central stated that their main priority is to maintain affordable premiums for their customers, regardless of whether they choose to pay monthly or annually. Customers who choose to pay monthly may incur slightly higher costs due to the added expenses of providing insurance in that manner. The company strives to assist their customers and acknowledges that circumstances may change during a policy, therefore they urge customers to reach out in such situations.
Source: theguardian.com
