Money Saving TipType: Advice
Expiry: Ongoing
Find out why paying monthly for your insurance policies could drive up the cost considerably.
What’s the deal
Most of the time we, as consumers, are rewarded for paying bills by direct debit, often receiving discounts and other benefits for doing so.
As a result, many of us go for the ‘pay monthly’ option by default, after all it’s usually a win-win situation – we get to spread the cost of paying for a service over the course of a year and the company we’re dealing with get the reassurance that the money will be collected from our account each month without fail.
However, what many people don’t realise is that this benefit rarely applies to dealings with the insurance industry and, as a result, end up paying heavily over the odds because of it.
Most insurers look upon pay-monthly options as a kind of loan. They let you spread the cost of your premium over the course of a year despite the fact that you can claim the full benefit of your policy from the word go.
For example, if you need to make a claim a week into your policy year your insurance company will still pay out in full even though you have only paid a twelfth of the premium.
Consequently, the vast majority of insurers charge a fairly substantial amount of interest for the added convenience of paying monthly. What with some insurers charging up to 30% APR (that’s an extra £30 for every £100 of your policy) this can bump up the cost of your insurance cover considerably and negate any savings you've made by shopping around.
How can I cut the cost?
The best way to avoid paying any interest on your insurance premium is to pay the full premium up front at the start of the policy year. Doing this for all of your insurance policies can cut the amount you pay out considerably.
However, if you have no choice but to spread the payments there are other options available to you. These include:
- Choose a policy that offers interest free monthly payments - A number of insurers are now offering this option and if they offer the best deal on your insurance it can be worth taking advantage of this facility.
- Pay on a 0% credit card - Using a credit card that offers 0% on purchases to pay the premium up front can be a good option as long as you pay off the balance before the interest free deal expires. It can be best to set up a monthly direct debit to ensure that you never miss a payment and clear the balance in full.
- Pay on a low interest credit card - With some insurers charging interest on insurance premiums at a rate almost double that available on standard credit cards it can work out cheaper to pay the full premium on your credit card and then spread your payments accordingly. If this is something you consider doing remember that you will need to work towards paying the credit card balance off as soon as possible to avoid paying excess interest. Again, setting up a direct debit for your credit card can be a good idea.
- Compare like for like - If you need to pay for your insurance monthly make sure that you compare policies on a like for like basis. Take into consideration the total cost including any interest and the cover provided when you compare different policies to ensure that you get the best deal.
- Start saving - Even if you can’t afford to pay up front for your insurance cover now it is a good idea to start saving a little money each month so that when you renewal comes around you’ll be able to cut the cost of your cover considerably.
