Premium finance is credit that lets a policyholder pay for an insurance policy in instalments, usually monthly, instead of paying the whole annual premium at the start of cover. In UK motor and home insurance it is provided by insurers, by intermediaries lending their own funds, and by specialist premium finance providers that lend through insurance brokers.
This entry explains how a premium finance agreement works, how its price is built up and who pays it, using the data the Financial Conduct Authority published in its 2024 to 2026 market study, and sets out the UK rules that apply. Figures are for UK retail motor and home insurance unless stated.
Premium finance in numbers
UK motor and home insurance paid with premium finance
The FCA reported that premium finance was used for 48% of motor and home insurance policies in 2023, accounting for 15 million motor and 8 million home policies.1 In 2024, 60% of motor and 41% of home buildings and contents policyholders who paid by instalments did so because they could not afford a single annual payment.1 Total premium finance revenue across personal and commercial lines was around £1.24 billion in 2023, of which £872 million came from retail motor insurance and £195 million from retail home insurance.2
How a premium finance agreement works
Premium finance is not sold as a standalone product. The FCA found that it is offered as a way to pay within the purchase of the insurance policy, and that it did not observe firms marketing it separately from the insurance.3 Premium finance with interest is a regulated credit agreement that is contractually separate from the underlying insurance policy.2
How a with-interest premium finance agreement works
The interest rate is fixed at the start of the agreement and does not vary, and the FCA found total interest ranged between 8% and 15% of the loan value.2 No provider in its data charged an additional fee for repaying premium finance early. Cancellation and mid-term adjustment fees belong to the insurance policy and were charged whether the policy was paid up front or with premium finance, with early cancellation fees between £20 and £50.2
Few applicants are turned down. Most insurers and intermediaries accept every customer who qualifies for the insurance, and the remaining providers had acceptance rates of 90% to 95%.3 The FCA found affordability checks more streamlined than for other forms of credit, with many providers performing only soft credit checks or none at all. Where finance is refused, it is commonly because of adverse credit history, such as a bankruptcy, or because the firm could not confirm the customer's identity or circumstances.3
Interest-free and with-interest plans
In 2023, approximately 85% of retail premium finance sold with motor and home policies charged interest, and the remainder was interest-free.2
| Interest-free (0% APR) | With interest | |
|---|---|---|
| Cost of paying by instalments | The same total as paying the premium up front, with no interest, set-up costs or administration fees | Interest under a regulated credit agreement, typically equal to an additional 8% to 12% on top of the premium, net of any deposit |
| Fees that can still be charged | Event fees, such as for late or missed payments | Missed payment fees |
| Share of premium finance, 2023 | 38% of home and under 3% of motor policies bought with premium finance | Approximately 85% of all retail motor and home premium finance |
| Regulated credit agreement? | Not for non-subsidised plans of less than a year; subsidised plans are | Yes |
The FCA distinguishes two kinds of interest-free plan. In a subsidised plan the lender charges interest but another firm in the supply chain pays it on the customer's behalf, and the plan is a regulated credit agreement; every interest-free plan arranged with a specialist premium finance provider is of this kind. In a non-subsidised plan there is no interest at all, the lender absorbs the funding cost, which is accounted for within the premium, and plans of less than a year are not regulated credit agreements. Non-subsidised plans were the vast majority of interest-free plans in 2023.2
The exemption for interest-free credit of this kind is in Article 60F of the Regulated Activities Order, which exempts a borrower-lender-supplier agreement for fixed-sum credit where the borrower makes no more than twelve payments, within 12 months or less, and the credit is provided without interest or other charges, subject to further conditions set out in the article.4
An interest-free plan is not necessarily cheaper in total. The FCA notes that its cost may be partly or fully priced into the insurance premium.2 Interest-free plans are more common for policies sold direct than through price comparison sites, and in home insurance, where mortgage lenders that partner with insurers typically require an interest-free payment option.1
Who provides premium finance
The FCA groups providers into three distribution models: insurers lending to their own policyholders, intermediary lenders funding premium finance for the customers they arrange insurance for, and intermediary brokers that introduce customers to a specialist premium finance provider, which lends.1
| Provider type | Share of premium finance policies, 2023 | Weighted average interest, % of loan balance, 2023 | Weighted average APR, 31 December 2022 | Weighted average APR, start of 2026 |
|---|---|---|---|---|
| Insurer | 58% | 10% | 19.9% | 16.5% |
| Intermediary lender | 26% | 10.4% | 28.9% | 23.5% |
| Intermediary broker using a specialist provider | 17% | 13% | 35.1% | 29.4% |
The columns come from different FCA datasets: the shares cover the whole market and are rounded, the interest figures come from 11 insurers, 8 intermediary lenders, 3 brokers and 3 specialist providers, and the APRs from 14 insurers, 8 intermediary lenders and 4 brokers, with the 2026 figure reflecting price changes up to 1 January 2026.1 Insurers, and large intermediaries with an affiliated insurer, supplied 81% of with-interest agreements in 2023 and fund them from their own working capital, which the FCA said may give them lower funding costs than firms using external funds.1 Independent brokers have smaller capital reserves and rely on cash flow from commission, which the FCA said makes it impractical for them to lend to customers while passing full premiums to insurers, so most partner with specialist providers.1
Bad debt ratios in 2023 ranged from 0.6% for insurers to 1% for intermediary lenders, and were around 3% for brokers.2 The FCA compared the brokers' 3% with bad debt rates of 1.9% for credit cards and 1.8% for personal loans.1
On 9 July 2025, Close Brothers Premium Finance announced its intention to withdraw from retail-focused broker relationships in the UK premium finance market. The FCA said this could reduce the choice of specialist lenders for brokers and lessen competitive pressure on the remaining lenders, and that it would monitor the effect on commercial terms.1
How the price is built up: net rate and commission
When a customer borrows through a broker and a specialist provider, the interest rate has two parts that the customer does not see separately: the net rate, which the lender keeps to cover its funding, operating costs and profit, and the commission earned by the broker.1 Rates, and so commission, do not vary between customers within a broker's portfolio. They are agreed at contract level, which is why the FCA concluded these are not discretionary commission arrangements as defined in its Handbook.1
| Item | Amount |
|---|---|
| Annual price | £750.00 |
| Deposit (10%) | £75.00 |
| Loan | £675.00 |
| Interest rate | 10% |
| Charge for credit | £67.50 |
| Total credit | £742.50 |
| Broker commission | £44.55 |
| Kept by the specialist provider | £22.95 |
| Total cost to the customer | £817.50 |
In data from four specialist providers covering more than 100 brokers, commission accounted for 55% of the total cost of credit on agreements financed by specialist providers, and for 66% of interest payments when fees such as default fees are excluded.1 The average commission was around £45 per policy between 2018 and 2023, and commission typically equalled 8% of the loan value for policies sold in 2023.1 All commission is paid upfront and is subject to clawback, for example if the customer cancels the policy.1
What brokers' premium finance costs were made of, 2023
Most broker agreements with specialist providers are on a recourse basis, so the broker bears the cost of bad debt, and brokers are often responsible for deposits, mid-term changes, cancellations and commission clawbacks.1 The FCA compared this with motor finance and found material differences: premium finance brokers often carry bad debt costs and cannot vary rates for individual customers, and average commission was about £45 per policy against £954 for non-discretionary motor finance commission in 2023, on credit agreements typically lasting 2 to 5 years.1
Home and motor premium finance compared
| Measure | Home | Motor |
|---|---|---|
| Policies paid with premium finance, 20231 | 8 million | 15 million |
| Share of those that were interest-free, 20231 | 38% | Under 3% |
| Average premium including insurance premium tax, 20231 | £250 | £460 |
| Average interest charge on price comparison sites, 2023, as a share of the premium1 | 10% to 11% | 11% to 12% |
| Price comparison site policies with interest above 15% of the premium1 | About 4% | About 12% |
| Retail premium finance income, 20232 | £195 million | £872 million |
The FCA attributed lower prices in home insurance to mortgage lender partnerships and to lower operating costs: home insurance had higher customer retention, fewer cancellations and lower exposure to bad debt than motor insurance.1 Some firms also cited more frequent cancellations and policy changes as a reason for higher rates on motor insurance.1
What premium finance costs, and how that has changed
| Policy | End of 2022 | Beginning of 2026 |
|---|---|---|
| Motor, £400 premium | £49.19 | £40.73 |
| Home, £220 premium | £18.12 | £15.30 |
The FCA's figures assume a 10% deposit, 12% insurance premium tax and 11 payments, and come from 14 insurers, 8 intermediary lenders and 4 intermediary brokers.1 Across this sample, the weighted average APR fell from 23.3% in 2022 to 19.2% in 2026, a reduction of 4.1 percentage points.1 Assuming 2022 volumes, and similar price cuts by firms outside the sample, the FCA estimates savings across the market of approximately £157 million a year.1 Three firms the FCA challenged directly reduced their APRs from 38% to 31% on average.1 The FCA attributed the changes to regulatory attention, fair value assessments and base rate reductions.5
An interest charge and an APR measure different things. The FCA found that policies on price comparison sites in 2023 typically charged interest equal to 4% to 13% of the premium, which it put at around 10% to 35% APR.1
APRs on UK home and motor premium finance, 2023
The FCA's data suggests that most plans above 30% APR, and the vast majority above 40% APR, are provided through a specialist premium finance provider.2 For comparison, it cited Bank of England data giving average advertised APRs in 2023 of 35% for an overdraft, 11% for a £5,000 personal loan and 23% for credit cards issued by financial institutions.2
Who pays for insurance by instalments
| Group | Pay by instalments |
|---|---|
| All UK adults who hold motor or home insurance | 43% |
| Adults in financial difficulty | 78% |
| Adults with low financial resilience | 65% |
| Black adults | 63% |
| Adults with investible assets of less than £10,000 | 62% |
| Renters | 60% |
| Lone parents | 58% |
| Aged 25 to 34 | 53% |
Paying by instalments falls with age: 34% of 18 to 24 year olds with motor insurance paid this way, against 16% of customers over 75. By region, the North East of England had the highest share for motor insurance, at 42%, and London the lowest, at 24%.3 Among contents insurance customers with a current mental health condition, 63% paid by instalments, against 44% of those who reported never having had one.3
The Financial Lives survey found missed payments to be rare, but many customers reported difficulty paying and few sought support.3 Most customers paying by instalments recalled their provider explaining the difference in cost, but 19% of those paying for contents insurance by instalments did not know which option was cheaper.3
Comparing quotes on price comparison sites
Over half of combined home buildings and contents and motor policies taken out in the three years to 2024 were bought through price comparison sites, which rank monthly quotes by total cost including premium finance.1 In data covering over 250,000 transactions from four sites, customers buying with premium finance chose the first or second cheapest total cost between 63% and 67% of the time, depending on the site, but chose the motor policy with the lowest interest charge in only 3% to 4% of cases.1
The FCA concluded that customers can compare interest-free and with-interest offers effectively when quotes are ranked by total cost. It noted one gap: a customer who compares annual quotes and then switches to paying monthly has not compared that total against other monthly offers.1
UK rules that apply to premium finance
Under the Consumer Duty, which came into force in 2023, firms must be able to show that the price a customer pays is reasonable compared with the overall benefits, and must assess this in a fair value assessment.51 Product governance provisions in PROD, in effect since October 2021, deal with premium finance specifically. Guidance at PROD 4.2.14I says a manufacturer that offers premium finance will need to consider whether its costs have a material detrimental effect on the value of the insurance product when the two are taken together, and should weigh the total price, including the APR, against the quality of the finance.6 The evidential provision at PROD 4.2.14M states that a firm should not increase the price of an insurance product where customers buy it using retail premium finance, unless the firm has an objective and reasonable basis for doing so.6
At renewal, ICOBS 6B.2.36R requires a firm responsible for setting the price of an additional product available in connection with a home or motor policy to ensure that its renewal price is no higher than it would be for a new business customer, and ICOBS 6B.2.37G states that for retail premium finance under a regulated credit agreement, that price is the APR.7 CONC 4.5.3R requires a credit broker to disclose prominently, in good time before the agreement, the existence and nature of any commission where it could affect the broker's impartiality or have a material impact on the customer's decision.8 Under section 87 of the Consumer Credit Act 1974, a creditor must serve a default notice before it can, because of a breach by the debtor, terminate a regulated agreement or demand earlier payment of any sum.9
| Date | Event |
|---|---|
| 1974 | Consumer Credit Act 1974, whose section 87 sets the default notice requirement9 |
| 1 October 2021 | PROD 4.2.14I and PROD 4.2.14M, the fair value provisions on retail premium finance, take effect6 |
| 1 January 2022 | ICOBS 6B renewal pricing rules take effect, covering the APR of premium finance at renewal7 |
| 2023 | The Consumer Duty comes into force5 |
| 16 October 2024 | The FCA launches its Premium Finance Market Study, MS24/210 |
| 9 July 2025 | Close Brothers Premium Finance announces its withdrawal from retail-focused broker relationships1 |
| 22 July 2025 | The FCA publishes its initial findings10 |
| 3 February 2026 | The FCA publishes its final report, with no price cap and no requirement to offer premium finance without interest105 |
Show References Hide References
- Financial Conduct Authority. MS24/2: Premium Finance Market Study, Final Report. February 2026.
- Financial Conduct Authority. MS24/2.2: The UK Market for Premium Finance. July 2025.
- Financial Conduct Authority. MS24/2.2: How and why Consumers Use Premium Finance. July 2025.
- The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Article 60F. legislation.gov.uk.
- Financial Conduct Authority. Falling cost of premium finance saving consumers around £157m a year. Press release, 3 February 2026.
- FCA Handbook. PROD 4.2: Manufacture of insurance products. Read 10 November 2026.
- FCA Handbook. ICOBS 6B.2: Setting renewal prices. Read 10 November 2026.
- FCA Handbook. CONC 4.5: Commissions. Read 10 November 2026.
- Consumer Credit Act 1974. Section 87: Need for default notice. legislation.gov.uk.
- Financial Conduct Authority. MS24/2: Premium Finance Market Study. First published 16 October 2024, last updated 3 February 2026.
Frequently Asked Questions
Is it cheaper to pay for insurance annually or monthly?
For the same policy from the same provider, paying annually costs less where the monthly option charges interest. On the representative policies in the FCA's final report, the average cost of premium finance at the beginning of 2026 was £40.73 on a £400 motor premium and £15.30 on a £220 home premium, assuming a 10% deposit and 11 payments. Across price comparison sites in 2023, the FCA found interest typically equal to 4% to 13% of the premium. With an interest-free plan, the total paid by instalments is the same as paying the premium up front, although the FCA notes that the cost of such a plan may be partly or fully priced into the premium itself.
The premium can also differ between annual and monthly payers. Firms told the FCA they held different views on whether a preference for paying monthly predicts claims: some said monthly payers are more likely to claim, which they said could add 10% to the insurer's cost, varying significantly by customer, while others said it was not a relevant factor, and one insurer said it priced premiums higher for monthly payers. The FCA found no evidence of credit risk being charged twice, in the premium and in the interest. PROD 4.2.14M states that a firm should not increase the price of an insurance product because the customer buys it using premium finance, unless it has an objective and reasonable basis. The cheapest option for a given customer therefore depends on the total of premium, interest and fees, which price comparison sites rank for monthly quotes.
Why is premium finance usually more expensive for car insurance than home insurance?
The FCA's market study found that, when interest is charged, rates are on average higher and more widely spread for motor customers than for home customers. On price comparison sites in 2023, the average interest charge was 11% to 12% of the premium for motor and 10% to 11% for home, and about 12% of motor policies sold there carried interest above 15% of the premium, against about 4% of home policies. Interest-free plans were also far rarer in motor: under 3% of motor premium finance in 2023, against 38% in home.
The FCA's final report gave several reasons. Home premiums are smaller on average, at £250 including insurance premium tax in 2023 against £460 for motor, and the FCA found home premium finance cheaper for firms to provide. Some firms reported higher operating costs on motor, such as more frequent cancellations and policy changes, and home insurance had higher retention and lower exposure to bad debt. In home insurance, mortgage lenders that partner with insurers typically require an interest-free option, and policies sold direct rather than through price comparison sites can absorb the cost of monthly payment in the premium. The FCA's market paper reported median APRs for motor premium finance in 2023 of between 23% and over 25%, depending on the dataset, with higher APRs of over 25% significantly more common in motor than in home.
Do you need a credit check to pay for insurance monthly?
With-interest premium finance is a regulated credit agreement, but the FCA found that affordability checks are more streamlined than for other forms of credit. Many providers perform only a soft credit check or none at all, and an initial credit check is usually treated as sufficient. Where it is not, the provider may look in more detail at the customer's income and spending, and may offer reduced or waived fees so that the finance is affordable. Firms told the FCA they consider insurance essential enough that advancing credit whenever possible is in the customer's interest.
According to the FCA's consumer paper, most insurers and intermediaries accept every customer who qualifies for the insurance, and the rest had acceptance rates of 90% to 95%. Where premium finance is refused, it is commonly because of adverse credit history, such as a bankruptcy, or because the firm could not confirm the customer's identity or financial circumstances. Non-subsidised interest-free plans of less than a year are not regulated credit agreements and do not require an affordability assessment, and under Article 60F of the Regulated Activities Order a borrower-lender-supplier agreement for fixed-sum credit with no more than twelve payments within 12 months and no interest or other charges can be exempt from regulation, subject to the conditions in the article. The FCA said it had not seen evidence that premium finance leads to frequent consumer harm from compounding debt, credit score damage or reduced access to credit.
What happens to premium finance if you cancel your insurance policy?
Premium finance with interest is a credit agreement that is contractually separate from the insurance policy. The FCA's market paper found early cancellation fees of between £20 and £50, which relate to the insurance policy and were charged whether the policy was paid up front or by instalments. No provider in its data charged an extra fee for repaying premium finance early. How any balance or refund is settled depends on the terms of the policy and of the finance agreement.
Behind the scenes, where a broker has arranged finance through a specialist provider, the FCA's final report found the broker is often responsible for cancelling the agreement, handling any commission clawback and chasing any shortfall. Most of those agreements are on a recourse basis, so the broker rather than the lender bears the cost of bad debt when a policy is cancelled, and brokers often carry out affordability checks alongside lenders as a result. In data from four broker firms, bad debt made up 45% of premium finance costs in 2023. If a customer stops paying under a regulated agreement, section 87 of the Consumer Credit Act 1974 requires a default notice before the creditor can terminate the agreement or demand earlier payment because of the breach.
Did the FCA cap premium finance interest rates?
No. In its press release of 3 February 2026 the FCA confirmed it would not introduce a price cap or require premium finance to be provided without interest, because this could restrict access to cover for customers who can only afford to pay monthly. The final report said a cap set above the average interest rates of the time, 12% for motor and 11% for home (interest charges as a share of the premium, not APRs), would at best change little and at worst signal to lower-charging firms that the capped rate was appropriate. It estimated that firms using the with-interest model earned around £1bn of premium finance revenue in 2023, and expected a ban would lead firms to raise premiums to recover it.
Instead, the FCA relied on the Consumer Duty's fair value rules and supervision of individual firms. It reviewed the fair value assessments of 10 firms with high prices, sent feedback letters to 3, asked 3 for attestations and directly challenged 4, and three of the firms it challenged reduced their APRs from 38% to 31% on average. It found that many firms in its review had robust assessments, and set out good and poor practice, such as poor practice in defining a target market only as customers eligible to buy the insurance. The FCA said it will monitor premium finance APRs through regulatory returns, engage with outlier firms and watch the effects of Close Brothers Premium Finance's withdrawal.
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