Direct debit trap could cost new car buyers

Almost half a million new cars sporting the much sought-after ’56 number plate will be sold this month, but drivers hoping to get a bargain on the forecourts could pay as much as 37 per cent over the odds for their insurance – if they pay by direct debit.

MoneyExpert.com, the independent financial comparison website, found that an average fully comprehensive premium of around £762 could rise to as much as £1,044 if you choose to spread your payments. Only 14 per cent of the 185 fully comprehensive motor insurance policies on the market don’t charge extra for paying by direct debit, and the average APR for those that do is an extravagant 21.5 per cent.

Of the providers that charge for the privilege of the direct debit payment option, APRs vary from as little as 2.5 per cent to as high as 37.12 per cent – that’s a difference of around £264 a year on the average premium.

And younger drivers or those with flashier tastes and consequently higher premiums will be hit even harder. For example, on a premium of £1,000 the average extra charge for direct debit is around £215, but this could be as high as £371 per year.

Insurers say that allowing drivers to pay by direct debit is increasing the risk they take on as they don’t have the whole premium in the bank from the moment they provide cover.

Sean Gardner, chief executive of MoneyExpert.com, said: “Motor insurance is expensive and opting to pay by direct debit is a popular way to spread the cost. However, this comes at a cost - insurers argue they are making a loan to customers if they let them pay in this way.

“The consequence is that any hard work you may have put in to shopping around for a cheap deal could be in vain as savings are wiped out by the extra cost.

“People should put serious thought into paying for their insurance in a lump sum, but a good alternative is to use a low-interest credit card. You can pay this off at a lower rate than the one on offer at your insurer and you may not have to pay interest at all if you take out a new card.

“The direct debit trap is always a nasty surprise and is usually discreetly hidden until the last possible moment by insurers. Customers need to be clear about all the charges they are facing and should ask for details of any financial agreement they are offered. Direct Debit from most insurers comes at a price.”

Only 17 fully comprehensive motor insurance policies charge under 15 per cent APR for their Direct Debit payment option. A further ten do not charge anything at all. That means that two out of three policies will charge an APR of 15 per cent or higher.

Insurers that do not charge any interest for customers paying by Direct Debit on motor insurance include Age Concern, AIG, Insure.co.uk, Virgin Money and Norwich Union.

Insurers’ terms for Direct Debit vary and will depend on how many monthly payments you make. Quotes may include a fee and an APR. Customers should ask what the APR is.

Anyone buying insurance should always shop around before buying a policy. You can also cut your premium by opting for a higher excess – the amount you have to pay before insurance takes up the bill.