Some motor insurance customers could find themselves being charged rates higher than they might pay on a credit card if they cannot pay for an annual policy up front, according to Which?
Premium finance gives customers the option to pay for their policy in monthly instalments rather than annually.
Which? said an estimated 15 million customers across the UK use premium finance to pay for motor insurance.
The consumer group carried out a mystery shopping investigation, collecting premium finance quotes in August from 30 motor insurance providers, to assess the deals on offer.
The same customer profile was used, and included the customer being a 42-year-old motorist based in Sheffield, driving for 10 years with no claims or incidents in the past five years.
The median average APR (annual percentage rate) across 36 quotes analysed in the mystery shopping investigation was 26.2%, although some rates quoted were as high as 50% plus.
Which? said this compared with around 25.9% for a credit card APR, according to its analysis of Moneyfacts data.
Some firms in the Which? insurance research charged 0% APR and some did not provide APR quotes.
Which? also said firms had told it that premium finance is associated with higher levels of credit risk, and that assessing APR in isolation does not give a complete assessment of the value provided to customers.
Firms also told Which? that premium finance arrangements were kept under review, to allow APRs potentially to be reduced.
But Which? argued that motor insurers should be banned from charging extra for monthly payments, as well as being required to offer a pay monthly option.
Rocio Concha, director of policy and advocacy at Which? said: “Too many consumers have already been pushed out of driving or into financial peril.”
She said that a “ban on two-tier pricing for motor insurance” would “create a fairer, more competitive system that doesn’t punish the customers least able to pay”.
James Daley, managing director of Fairer Finance said: “It can’t be right that the poorest people in our society are forced to pay the most for their car insurance.”
Graeme Trudgill, chief executive of the British Insurance Brokers’ Association (Biba), said: “Premium finance serves a valuable purpose, helping consumers to spread the cost of their insurance cover.
“It is important that anyone involved in arranging premium finance can demonstrate that they are offering fair value and that they are transparent about the cost of the finance to their customer.
“The FCA’s (Financial Conduct Authority’s) recent report on premium finance highlighted that typically in the broker market, APRs inclusive of any broker commission is generally comparable to other forms of credit a customer could obtain to pay for their insurance cover.
“We continue to help our members to show that their overall package to consumers offers fair value through our fair value assessment framework and we also have a member guide to refer to when arranging premium finance.”
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.
“When an APR is charged, our members are committed to ensuring it’s fair, transparent, affordable and proportionate for their customers.”