Some motorists could be charged nearly 40% APR (annual percentage rate) when paying for their insurance monthly, according to Which?.
The consumer group also said some home insurers are charging nearly 35% APR on monthly payments.
It added the rates being charged by some insurers to pay for monthly cover resemble the interest applicable for credit card borrowing.
Which? asked 39 car insurers and 34 home insurers what APRs were being applied to monthly payments.
Many insurers did not disclose their APR, but among those that did, Which? found 1st Central charges between 5% and 39.11%. It gives customers a personal interest rate after a credit risk assessment, Which? said.
The average rate across 27 providers that charge interest and disclosed their rate was 23.37%.
Only two car insurers asked – NFU Mutual and Hiscox – said they do not charge interest on monthly repayments.
1st Central told Which?: “We understand it is important to customers that we keep the price of insurance as low as possible, and benchmarking tells us that we are competitive for both annual premiums and for those that wish to pay monthly through a credit arrangement.
“We offer a range of APRs from 5% to enable us to provide credit to as many customers wishing to pay monthly as possible, including those with low or poor credit scores. Over the past quarter, less than 2% of customers paid our highest APR.”
1st Central also said consumers may focus on the total monthly cost – where it is often highly competitive.
For home insurance, the highest rate in the Which? study was from Co-op Insurance. Which? found customers pay between 31.31% to 34.75% APR on monthly payments.
The average across the providers that charge a rate and disclosed it was 23%.
Co-op Insurance works with partners to provide insurance cover and it said it is looking to reduce rates where possible. It added it chose to share its rates with Which? as it is committed to transparency.
A spokesperson for Co-op Insurance said: “Co-op Insurance welcomes this survey analysis from Which?.
“We recognise the importance of premium finance as a product in the insurance industry, giving customers the option to spread the cost of their insurance over the course of a year.”
Co-op Insurance said an insurance partner performs regular benchmarking, adding: “This benchmarking has led us to review these rates and we are looking to reduce them. We will update our customers on this as soon as we can.
“At Co-op, we are committed to transparency for our customers and have taken such an approach when responding to Which? throughout this process.”
Fifteen home insurance providers surveyed said they do not charge interest: Bank of Scotland, Halifax, Hiscox, HSBC, Lloyds Bank, MBNA, M&S Bank, Nationwide Building Society, NFU Mutual, SAGIC, Sainsbury’s Bank, Santander, TSB, Urban Jungle and Yorkshire Building Society.
Which? said that in January this year, the average credit card rate was 34.8%, with the majority of cards charging up to 25%.
But Which? argued the risk to insurers is lower than for credit card providers, because the credit being offered is directly linked to the sale of the insurance policy and non-payment by customers can lead to the cancellation of the policy.
Since January 2022, motor and home insurers have been required to provide fair value on their products and those requirements have been further strengthened by the introduction of the Financial Conduct Authority’s Consumer Duty last year.
Which? said the regulator should produce an action plan to make sure that firms are providing fair value in the interest rates they are charging customers. It called for a league table of providers to be produced by the regulator.
Rocio Concha, Which? director of policy and advocacy, said the FCA should “step up and to get tough with firms”.
A spokesperson for the Association of British Insurers (ABI) said: “Our members understand how important access to appropriate insurance is for their customers and are very aware of the financial pressures households are currently under.
“Paying premiums by monthly instalments is an option they offer to help customers manage their budgets.
“The cost of premium finance is one of a number of topics we continue to discuss with our members and the Financial Conduct Authority.”
An FCA spokesperson said: “Premium finance helps people to spread the cost of insurance. We have made it clear to industry they need to ensure people are getting fair value from it.”
David Mendes da Costa, principal policy manager at Citizens Advice, told MPs on the Treasury Committee on Wednesday that the charity is seeing a “clear rise” in people coming to it for help who are unable to afford their insurance.
He said: “To be clear, insurance really is an essential, especially when it comes to car insurance at least. People need it to drive and people need to be able to drive in order to look for work, in order to get to work, in order to make hospital appointments or run their kids to school.”
He said people are having to make “impossible choices”.
Mr Mendes da Costa later told the committee: “We know that people on lower incomes tend to be charged more for their insurance, setting aside this question of annual versus monthly (premiums).
“What we see in our own data is that people of colour are charged on average £250 more for their car insurance than white people.
“What we think is none of this is direct discrimination, no-one’s collecting this data in order to do so, we think it’s indirect discrimination on the way that postcodes are treated and in the way that risk is attached to it. But there’s no clarity on what’s driving that, what risk factors are attached to postcodes, or what cost factors are attached to them.”
