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Pay-as-you-go car insurance

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As the cost of car insurance continues to rise, pay-as-you-go insurance could be a way of reducing premiums.

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The vast majority of car insurance policies are aimed at motorists who use their motors all year round and on a regular basis.

But some drivers don’t use their cars particularly often, or only rely on them for short periods every now and then.

For them, paying hundreds or even thousands of pounds for a normal annual comprehensive policy might seem unnecessary and uneconomical. This is where pay-as-you-go insurance comes in.

This type of cover can also be suitable for young drivers, who tend to face high premiums. These policies have premiums that are set in line with how often – as well as how carefully – you drive.

How does pay-as-you-go car insurance work?

The term pay-as-you-go usually refers to a type of policy where telematics technology is used to record information about when and how you drive your car.

Premiums are then set according to the number of miles covered, as well what times of day your car is on the road and how sensibly it is driven. 

Such policies are also commonly known as black box insurance – a device would be installed in your car in order to record driving data. This data is transmitted back to your insurer automatically and then used as one of the factors when working out your premium. 

Who is pay-as-you-go insurance aimed at?

Pay-as-you-go policies have become increasingly common in recent years as the cost of insurance faced by younger drivers has increased. For the under-25s, annual comprehensive premiums can run into the thousands of pounds, making cover unaffordable for many newly-qualified drivers.

The reason for these high prices is that, statistically, young drivers are more likely to be involved in accidents and make claims on their policies.

Of course, not every young motorist drives recklessly. But insurers generally rely on statistics about groups of customers when setting premiums. Age and experience have been found to be some of the more influential factors when it comes to the risk of having an accident.

The advantage of telematics policies is that they allow young motorists to show insurers that they can drive responsibly and should therefore be entitled to lower premiums than others in their age group.

Telematics policies aren’t restricted to young drivers – but for older motorists, they tend to have less appeal as the potential savings could be smaller.

But bear in mind that some insurers may impose minimum age requirements, such as 21: as with any type of policy, shop around and check the small print before you buy.

Is pay-as-you-go insurance cheaper?

The reason pay-as-you-go insurance policies were introduced was to give drivers the chance to cut their premiums. But there’s no guarantee this kind of insurance will be cheaper. It really depends on each person’s individual circumstances as well as how much, and how well, they drive.

Pay-as-you-go cover gives you the opportunity to pay less for insurance if you don’t use your car a great deal. While standard policies also use annual mileage as a factor in setting premium levels, it’s an estimated figure rounded to the nearest thousand miles.

Pay-as-you-go insurance uses a much more accurate figure and therefore should give you a more accurate price.

But generally speaking, using your car infrequently if you have a telematics policy could have a more significant impact on the cost of cover.

Overall, the lower your annual mileage – and the younger you are – the more you stand to gain from a pay-as-you-go insurance policy. You could also pay less if you don’t use your car at times viewed by insurers as higher-risk, for example at night.

Bear in mind also that some pay-as-you-go policies may impose mileage limits on their customers. If you exceed these limits you could face a sharp increase in costs.

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New types of pay-as-you-go car insurance

Some providers have introduced new types of pay-as-you-go insurance that are similar to mobile phone contracts.

These policies typically involve paying a fixed monthly amount based on your age, where you live and your claims record, among other factors. Extra charges are then added based on either how many miles you drive or an hourly rate depending on how long you use your car.

As with existing telematics policies, a device needs to be installed in the car to record driving data.

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