Drivers have been found to be paying more for car insurance if they opt for monthly instalments over lump sums, with a huge difference of roughly £300, leaving customers out of pocket.
It comes after a probe into the car insurance industry found stark differences in price points for drivers, with insurers now facing questions from the Government over fair value for motorists.
During a Treasury Committee hearing, MPs questioned several insurers over the option to split the cost of premiums into monthly instalments rather than lump sum payments.
Additional costs to drivers paying monthly included administration fees for insurers and credit risks to firms, which all hike prices.
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Reports by Which? found that drivers were charged more for monthly cover than lump sum payments
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The report by Which? detailed how in September 2023, monthly payers of car insurance paid £892 on average, while annual payers paid £583, marking a key change in price.
Young drivers were hit the worst price difference as the report found they were more likely to pay for insurance monthly.
The investigation revealed that the average extra cost for paying monthly for an 18-year-old was £459, but only £41 for a 59-year-old and £82 for a 39-year-old.
Rocio Concha, Which? director of policy and advocacy, said at the time: "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."
Car insurance prices vary, with costs changing depending on payment plans
GETTYHe warned that the practice "isn't right" with it being up to the financial regulator to outline an action plan to tackle the "unfair costs of paying monthly for insurance".
Speaking at the hearing, Jason Storah, CEO of UK general insurance at Aviva, defended the decision to offer both types of cover.
"We think that we charge a fair amount and just to bring it to life, on a £500 motor policy, a customer that is paying monthly will pay about £3 a month in the financing," he said. Storah explained that the cover option was not "making any real money" on the financing of monthly pay products.
Meanwhile, Alistair Hargreaves, CEO at Admiral Group, shared that car finance charges were reasonable and "compare favourably to other sources of finance".
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He stated: "In terms of when a consumer buys insurance, most of our customers and most customers, for example, in motor and home, go on price comparison.
"And for most of the price comparison sites, if they select to pay monthly, they're looking at a monthly payment, they include the instalment charge as well as the underlying premium. And they, consumers, typically choose one of the cheapest three providers."
He noted that the company was keen to be competitive but also offer fair value to customers and monthly payers. "So we look at the overall package to make sure that what customers are paying is fair," Hargreaves shared.
Jon Walker, CEO of AXA Commercial, highlighted how its earnings from monthly car insurance instalments represent a "pretty small percentage of our overall earnings".
Several car insurers were questioned by MPs over the costs associated with monthly payments
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"There are additional costs that are incurred around the administration of providing instalment options, and the reporting of it. There’s also an element of risk the insurer takes," he said.
The insurers were questioned whether or not having a lump sum available to pay annually would give a customer a higher risk profile in the first place.
Hargreaves responded: "In terms of how we assess risk, we use all of the information that a customer provides, and 90 per cent of our customers come from comparison sites. So what we're trying to do is we’re trying to estimate the claims cost for that customer and price them for that claims cost as competitively as possible."
He claimed that it is "within our interests" to try and price claims risk as "competitively as we can" because of the size of the market.
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