With car insurance premiums on the rise, it makes sense to look for ways to keep costs manageable. Many insurers let you spread payments for your annual premium across the year, which can help with budgeting. But additional fees mean that paying monthly could cost you more in the long run. We outline the pros and cons of paying annually vs monthly for car insurance, and other ways to keep premiums down.
For standard car insurance policies, which typically last for a year before needing renewal, there are two main ways to pay.
When you get a quote for car insurance, directly with an insurer or via a price comparison site or broker, you’ll usually be shown both payment options.
You can also get temporary car insurance, which lasts for anything from a few hours to 30 days. Because temporary car insurance is for the short term, you’ll typically pay for it in one go (though you may be able to extend your cover for an additional premium).
Paying annually for your car insurance is pretty straightforward. Once you’ve completed the quote process and selected an insurer, your chosen insurer will tell you the cost of your annual premium, including any optional extras. Usually, the quoted price will be held for up to 30 days, to give you a chance to make up your mind.
When you’re ready, it’s a simple case of making the annual payment. Payment methods usually include debit card, credit card and, in some cases, bank transfer. Cover can start on the date you make payment, or a few days later, if you prefer.
Paying monthly for your car insurance, as you’d expect, involves splitting your car insurance premium over multiple monthly instalments. You make one up-front payment at the start of the policy. This is followed by 11 (or occasionally 10) subsequent monthly payments that are taken using the same payment details you supplied at the outset.
So far, so straightforward. But if you want to pay monthly, there are a couple of things to be aware of.
When you run a quote for car insurance, you’ll be quoted two prices; to pay annually, and to pay in monthly instalments. The cost of paying in monthly instalments will include the interest that the insurer applies. There’s no “set” interest rate for car insurance monthly payments – it will vary between insurers, so you’ll need to compare carefully.
Some insurers split the total annual premium, equally including interest, across 12 (or sometimes 11) monthly payments. But most charge a higher up-front payment (including a deposit), and split the remainder equally over subsequent months.
It depends what you mean by better. If by “better” you mean “cheaper”, then the answer is almost always annually. That’s because by paying annually, up-front, you won’t incur the extra interest charges that most insurers apply if you pay monthly.
But with the average annual car insurance premium sitting at £627 as of January 2024, and frequently topping £1,000 for younger, less experienced drivers, taking the financial hit all in one go isn’t always viable. If this is the case, monthly payments could help you to manage your budget.
You’ll get the same features and the same level of cover from an insurance policy whether you pay annually or monthly, so what’s best is really down to your personal circumstances.
In many cases, yes. When you pay monthly, most insurers require you to make a larger proportional up-front payment – usually between 15 and 25% of the total premiums for the year.
A few insurers offer “no-deposit” car insurance policies, where the monthly instalments are split equally. This could lower the initial amount you need to pay, but you’ll need to weigh up this benefit against the total cost of the policy.
It can do, in a couple of ways.
Firstly, paying monthly effectively means taking out a loan (aka applying for credit) with an insurer. Simply getting quotes, for example via a price comparison site, won’t have an impact on your credit rating. But when you’ve selected a provider and complete the application process, it will run a credit check that will appear on your credit file. Be aware that multiple checks on your file in fairly quick succession can have a negative impact on your credit rating. So it’s best to review the details of a policy before you complete the application, so you can feel confident it’s the one you want and avoid the need to make multiple applications.
Secondly, once you have the insurance policy, how good you are at keeping up payments can also affect your credit rating. Making all of your payments on time can help prove your credit-worthiness and boost your credit score, particularly if it was on the low side to start with. But if you are late with or miss any payments, this could have a negative impact on your credit score. This could potentially affect your ability to get affordable credit with other providers in the future.
Many car insurance providers let you make up-front annual payments via credit card. Provided that your credit card provider charges a lower interest rate than your car insurer, it can be a good way to spread the cost of your premium over several months. If your credit card provider charges a higher rate of interest than your car insurer, and you can’t afford to pay the credit card debt off in within a month or two, then you’d likely be better off using your car insurer’s pay-monthly option.
If you have a 0% credit card, and will be able to pay the full amount of your premium off within the interest-free period on your card, this could allow you to spread your car insurance payments without incurring any additional costs.
Paying your full annual premium up-front is one way to keep the cost of insurance down, but this isn’t always financially practical. Other tactics you can use include:
While paying monthly for your car insurance can avoid a big up-front financial hit, it will almost always cost you more overall, thanks to the interest you’ll be charged. So before resorting to paying monthly, we’d recommend using all the money-saving tactics at your disposal to cut the baseline costs of insurance premiums. Your wallet will thank you, whether you end up paying annually or monthly.
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