Labour urged to scrap ‘poverty premiums’ in Budget as drivers risk paying £370 extra

Which? reported that around 15 million Britons use “premium” finance to pay for motor insurance, rather than paying annually.

As part of a mystery shopping investigation, the consumer group collected premium finance quotes in August from 30 different providers.

It used the same customer profile for all providers, namely a 42-year-old from Sheffield with no claims in the last five years, and a licence holder for 10 years.

The average annual percentage rate (APR) across 36 quotes was 26.2 per cent, although some quotes were in excess of 50 per cent.

In comparison, some firms charged zero per cent APR, with an average of 25.9 per cent for a credit card APR.

Which? reported that firms claimed premium finance is associated with higher levels of credit risk.

Insurance companies noted that premium finance arrangements were kept under review, allowing for APRs to be reduced under some circumstances.

Which? described the arrangement of charging more for monthly payments as a “poverty premium”, highlighting that 53 per cent of customers cannot pay upfront.

In cash terms, APRs above 50 per cent could cost drivers as much as £367.75 more when tallying up an annual motor insurance bill.

Rocio Concha, director of policy and advocacy at Which?, called on the Prime Minister to use the upcoming Budget to ban “two-tier pricing” for motor insurance.

She added: “Too many consumers have already been pushed out of driving or into financial peril because of these unfair pricing practices that we’ve found can charge less wealthy customers more.

“Our latest investigation exposes the consequences of the regulator shying away from its responsibility to ensure competition works for consumers.

“We believe it is the best way to create a fairer, more competitive system that doesn’t punish the customers least able to pay.”

Graeme Trudgill, chief executive of the British Insurance Brokers’ Association (Biba), acknowledged that premium finance serves a “valuable purpose”.

He stated that anyone offering car insurance should be able to demonstrate “fair value” and be transparent about the way they charge customers.

A spokesperson for the Association of British Insurers (ABI) said: “Many households are under financial pressure, making the protection that insurance provides against unexpected shocks more important than ever.

“We know that people value the option to pay monthly to keep their insurance affordable and accessible.

“Providing pay monthly options involves some costs for insurers, including keeping cover in place for a period if payments are delayed or missed.”