When buying car insurance, you’ll have the choice of paying for it annually or spreading the cost across monthly payments via Direct Debit. Each approach has its upsides and downsides.
We discuss what to consider when buying annual versus monthly car insurance, including the potential implications for your credit score.
With like-for-like policies, it’s cheaper to pay annually. Monthly payments will cost more than paying for the annual policy in one go.
To pay monthly, we'll need to lend you the total cost of your premium, which is known as fixed sum credit. You pay this back to us monthly and, since it's a loan, you'll pay interest.
But there are other advantages and disadvantages when considering whether to pay for your car insurance annually or monthly.
Paying annually is cheaper overall, as you don’t have to pay interest. But there are other advantages:
The main disadvantage is you’ll have to pay more in one go. But if you can afford to spare the money for the one-off payment, it’ll be better for your bank balance overall.
Car insurance policies don’t need a deposit as such. If you see ‘no deposit car insurance’ advertised, it just means that this kind of policy is paid for monthly.
But you do need to make an upfront payment before being insured, regardless of your policy.
If you’re paying monthly, this will usually be 20% of the annual total, which is paid in the first month, with the remaining 80% spread over the year.
You can get car insurance even if you have a low credit score.
This is especially true if you plan to pay for your policy annually. Your insurer will check your credit report, but it’ll be a soft search to confirm your identity and limit the chances of fraud.
A low credit score could limit your options if you want to pay monthly. This is because you’ll need a full credit check, with insurance providers looking at your credit report in greater detail.
If a provider is concerned that you may be unable to make your payments, they may decline to offer you insurance.
Find out more about credit scores, including how to improve a low credit score.
While making monthly car insurance payments is more affordable in the short term, it’ll cost you more in the long run. A more sustainable approach could be to try to reduce your car insurance costs.
For instance, if you’re a young driver, you might find that a black box policy, which monitors your driving habits and ability, could reduce the price of your car insurance.
Find out more about how to reduce your car insurance premium here.