Car insurance firms target some customers with high-interest rates in ‘a tax on the poor'
Car insurance firms are dramatically overcharging monthly customers with extra interest charged to motorists described as a "tax on the poor".
Car insurance customers who cannot pay their policy upfront are charged extortionate interest of up to 30 percent according to a new investigation by Which?.
The consumer watchdog contacted 39 car insurance providers in March to find out what interest rates they would charge monthly customers.
A stunning revelation found some firms were charging owners up to 34.75 percent APR on top of their monthly premiums.
This is set to add hundreds of pounds onto motorists' bills meaning those without cash in their accounts to pay upfront are hit with higher fees.
Which? recently discovered that one customer was quoted a staggering £504 extra for using a premium finance option.
Matt Brewis, Head of Insurance at the Financial Conduct Authority, recently called premium finance as a 'tax on being poor”.
This has since been supported by Which? who described its findings as “shocking”.
Rocio Concha, Which? Director of Policy and Advocacy explained: “Motorists need car insurance to be on the road legally, and the vast majority of mortgage lenders will insist on homeowners having cover - yet those who can’t afford to pay for their premiums all in one go are being penalised with eye-watering interest rates.
“The regulator has been clear - paying for insurance monthly is a tax on being poor, and it’s shocking to see providers still trying to justify the practice.”
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Motorists who pay monthly are charged interest because firms are effectively lending drivers the amount for the full premium which customers then gradually pay back.
According to Which?, the highest interest rates outlined by firms resemble interest payments seen in credit card borrowing.
This may put cash-strapped families at risk of not being able to keep up payments with many at considerable risk.
Which? warns that motorists who default on their monthly payments could have their agreement immediately axed.
Companies can hand motorists just a week's notice before a contract can be terminated, leaving road users effectively banned from getting behind the wheel.
Rocio added: “Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually.
“It is now time for the FCA to step up and to get tough with firms that take advantage of customers who can least afford it.”
