Car insurance providers charge more to pay monthly

The car insurance industry is netting almost £624 million a year from the 13 million motorists who pay for their car insurance on a monthly basis instead of one annual payment, according to research by uSwitch.com.

Providers charge an average APR of 23.8% which is more than four times the current best buy unsecured personal loan rate (6.9% APR). This could be another added cost for motorists who have already been hit with petrol price hikes of 31%, escalating the annual cost of insurance and fuel to £2,482 - 14% of the average net salary and £500 more than a year ago.

For many motorists, spreading the cost of car insurance over 10-12 months makes the policy appear more manageable. However, this short term relief costs motorists more in the long run. Over half of all UK policy holders (52%) are choosing to pay this way and by doing so are handing over almost £50 each a year on top of the cost of the policy.

uSwitch.com's analysis shows the average insurance policy currently stands at £459.44 creeping up to £506.76 a year for those who pay on a monthly basis. For example, a male insuring an Audi A4 who has held a driving licence for 13 years will see his annual policy with the AA increase from £553.50 to £621.30 - a £68 increase and the equivalent APR of 24.9%.

Ashton Berkhauer, insurance expert at uswitch.com comments: "As insurance costs, petrol prices and general living expenses are soaring, motorists should think twice before agreeing to monthly payments on their car insurance. It may seem like a neat solution if you're cash strapped but it carries a hefty interest price tag so should be avoided where possible. Of course, if you can't afford to pay for car insurance in one lump sum then this initiative could be a godsend. For those with more financial options, this really is an unnecessary expense which merely inflates the cost of the policy."

If paying upfront is too much for some consumers, shopping around for an insurance provider, such as Virgin, which doesn't charge for monthly instalments could be another option. The APR charged by every insurance provider varies so consumers who have no choice but to pay monthly should look for the cheapest option. However, the actual cost of the premium should remain the key focus as the provider offering the lowest APR for monthly payments may not offer the most competitive policy price. Finally, using a competitive credit card such as HSBC's 0% on purchases for 12 months could be an option to spread the cost without having to pay more for insurance.

Berkhauer's top tips on purchasing car insurance:

Always shop around to ensure you are getting the best deal on your car insurance policy

If possible pay the full amount of your insurance up front to avoid paying unnecessary charges

If you can't afford to pay the full amount of you car insurance up front check your insurer's APR and shop around for a more competitive alternative or looki at 0% credit cards

To avoid any nasty surprises always check your policy documentation thoroughly and make sure you understand what you are covered for, and what your excess is should you be involved in an accident.