Drivers pay 10 per cent extra for car insurance if they choose to make monthly payments, new figures show – and the problem is getting worse, not better.

Insurers typically charge higher premiums to motorists paying for cover in monthly installments, not one big yearly chunk.

The average car insurance premium is £623 for drivers than can afford to pay upfront, new research from CompareTheMarket found. When paying monthly that rises 10.4 per cent, or £65, to £688 a year – for the exact same car insurance deal.

But that figure is just an average, and the real cost may be far higher depending on the driver.

Car insurance firms argue that paying monthly needs to cost more, because it involves taking out a loan for the premium, which is then repaid with interest as the year goes on. 

Driving us mad: Insurers can charge up to 20 per cent more for buying the same insurance deal monthly, not yearly

The interest charged can cost drivers more than 20 per cent extra a year.

In tests done by This is Money, the cheapest comprehensive insurance deal for a 45-year-old woman driving a Honda Jazz was £585.33 a year, rising by 8 per cent when paying monthly – less than average.

However, the second-cheapest quote rose by an astonishing 20.3 per cent when paying per month.

The top three cheapest comprehensive car insurance deals for a 35-year-old male with a Peugeot 208 all charged 12.4 per cent more for paying monthly.

All drivers face rising car insurance costs, with premiums reaching a three-year high. But these bills are going up fastest for those paying monthly.

CompareTheMarket said the average cost of paying annually for car insurance has increased by £71 year-on-year, while the cost of paying monthly has risen by £83 on average.

CompareTheMarket motor insurance expert Julie Daniels said: ‘As living costs continue to rise, many motorists are feeling financially squeezed. Saving on your car insurance is always attractive, considering that the average cost of car insurance is more than £600. 

‘Although making smaller monthly payments might seem easier, if you’re in a financial position to be able to pay your car insurance policy annually, it could lead to savings of up to £65.’

Car tax hikes for monthly payments

The phenomenon of motorists paying more for monthly installments does not end with insurance, however.

The same is true for car tax as well.

Paying car tax monthly costs 5 per cent more than buying it upfront in one go.

For example, car tax that costs £165 to buy upfront costs £173.25 when split into 12 monthly direct debits.

Why are car insurance premiums rising? 

The increase is down to several factors. Partly, the increase is a return to pre-pandemic norms. During the worst of the lockdowns, car insurance prices fell due to insurers paying out fewer claims for fewer journeys.

The UK’s return to a pre-Covid way of life has meant more car journeys, more theft and crashes and therefore higher premiums.

Regulation is also part of the reason insurance costs for motorists are going up. Last January insurers were banned from a practice known as ‘price walking’.

Price walking is when insurers charge renewing customers more in order to charge new customers less.

This ban led to premiums starting to creep up for new drivers, though renewing customers save money overall.

The Financial Conduct Authority regulator, which brought in the ban, estimates it will save the public £4 billion over the next ten years.

However, the FCA made that prediction before the cost of living crisis kicked in, and that is another reason why premiums are rising.

Insurers’ own costs are rising, and these are being passed on to their customers. Energy costs and the cost of things like spare car parts are increasing, and this is also behind the car insurance price hikes.