Andrew leads our Operational Team and is our expert when it comes to all the ins and outs of car hire excess insurance.
Car insurance premiums can be pretty high, especially for younger drivers. Insurers recognise this and most will offer to let you spread the payments over the year which is nice. But recently we've been noticing that effective interest rates and total amount payable are often a lot higher than you might expect.
The Admiral group of insurers including Admiral, Elephant, Diamond and Bell, seem particularly reluctant (or is that keen?) to lend you money. A quote with Elephant for a 49 year old male with a clean driving record went from £378 as a one off payment to £479 paying by instalments. That's a 26.5% increase in price and given that you pay one month down & spread the rest over 11 months, in Annual Equivalent Rate rates it works out over 32%.
Bell from Admiral were slightly worse. A quote of £487 became £643, a straight 32% increase and around 40% AER.
Checking out the elephant.co.uk site for the terms and conditions for paying for insurance by instalment we found this Pre-Contract Credit Information document. Under section "3. Costs of the credit”, it shows a borrowing rate of 8.5%. Confused, we phoned for confirmation of the costs. Unfortunately though the friendly and helpful representative could give the payment details and agree it was about 25% more, he was unable to confirm what interest rate that represented, though found a figure of 18.6% APR and suggested maybe one had to add that the the 8.5% on the Pre-Contract Credit Information document? We think the 8.5% rate on the Pre-Contract Credit Information information document was simply an example and you have to wait to get the real thing to find out what rate actually applied.
But that's not the worst example of rate hikes we found. A quote for a young driver on a provisional licence with Admiral came through at £2699. Pretty heavy and over £1200 more than the cheapest quote we found, so that would be good to spread over 12 months wouldn't it? Not with a total repayment of £4900 it wouldn't! That's heading for pay day loan territory! Actually to be fair, it's not, pay day loans are a staggeringly awful way of borrowing money but it still represented an increase of over 81%.
Moving away from the Admiral group, most insurers seem happy to inflate the premium by more modest amounts, typically between 12-18%, though some want higher initial payments and split the rest between 9 and 11 months. That can make a surprising difference to the Annual Equivalent Rate.
If you do need to spread the payments, do check the total payable figures carefully, it could easily turn that 2nd, 3rd or 4th least expensive quote into the best one. It could also be worthwhile finding other ways of paying on cheaper credit. One option if your credit history is reasonable would be to use an interest free credit card. Get a new credit card with interest free purchases, pay the insurance premium with the card and pay off the loan monthly. A couple of cautions on this approach do apply. Firstly, your insurer may charge you for paying by credit card so take that into account. Secondly, you need to be disciplined enough to make the payments on the credit card rather than max it out. If you can't afford to pay for a years worth of insurance over the year you're heading for trouble!