Read this guide to car insurance for information about how car insurance works. Most importantly, how does your insurance company calculate your premiums? Did you know if you modify your vehicle it can push up the price of your insurance? 

Payday Loans Net, a payday loans UK company, analyse ways to save on your premiums and common mistakes to avoid when filling in an insurance form. Then we continue with advice on where to purchase car insurance. We explain how to shop around for the best deal using calculators and to compare quotes. Also. we examine what you need from a good insurance policy. Then we turn our attention to how young drivers (aged 17-24) can reduce high premiums they pay.  Finally, we answer the question: why does car insurance go up every year? 

Car insurance quotes in the UK

All vehicles in the UK are legally obliged to have car insurance. Cars parked by the side of the road, or in a garage need insurance as well. The only exception is if you register the car as off-road. Do so with the DVLA and receive a SORN (Statutory Off Road Notification).Many insurance providers send you a reminder when your policy expires, although not legally obliged to. Plan ahead when your policy is up for renewal. You might receive a discount of up to £100 if you buy 30 days beforehand.  If you plan and buy insurance in advance, your insurer will classify you as less likely to be a risk-taker. Someone who is not a risk-taker will be less likely to be involved in an accident, so will pay less as premium.

You pay car insurance every month or even year. Did you know you might get a lower price if you pay in a lump sum as interest on instalments?  If you are self employed, you can treat your vehicle insurance as tax-deductible. So don’t forget to include it in your expenses and make further savings.Let’s begin with the basics: what are the types of car insurance which are available, how will your insurance provider calculate your premiums? Where can you purchase your car insurance?

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Types of car insurance quote

There are three kinds of car insurance: third party, third party, fire and theft and comprehensive. Third party is the minimum insurance cover you can get. It covers injury and damage to others but not to yourself.  It is worthwhile for you to take out third party insurance if you do not have a no-claims bonus or you live in a high-risk area. If your car is worth less than £1,000, and you could afford to replace it, it is also worthwhile.

Third party, fire and theft give the same basic cover as third party, but you are also covered for repairs or a replacement if a thief steals your car or if your car is damaged by fire. Comprehensive car insurance would cover you for all damage regardless of whose fault the accident was.  You might also drive other people’s cars (with their permission) with third party cover only.  Some people assume that third party cover must always be cheaper than comprehensive car insurance, but this is not always the case. So when you shop around for quotes, you should bear this in mind.

Car insurance companies operate by taking your money in monthly or annual instalments (in the form of premiums). They they use this ‘pool’ of money to pay out any claims that some policy-holders make during the year. These are claims due to accidents, theft, etc. Actuaries calculate premiums based on statistical probability. They look at what are the odds in general of this happening to you (an accident, theft, etc). They also look at how you compare to the average policy-holder.  Are you more or less likely to make a claim? 

Cheap Car Insurance

Young drivers of 17-24 pay much higher premiums than experienced drivers.  Did you know that 1 in 5 new drivers have an accident in their first year of driving? One quarter of accidents in the UK involve a driver in this age group.  You might not know, but insurance companies most certainly do. That is why they hedge their bets and charge young drivers more. Knowing what factors influence the price of your insurance cover can sometimes help you to reduce the money you pay.  

Apart from your age, car insurance companies also require other information about you to calculate your premiums; your occupation, where you live and your driving habits.  Did you know that certain groups are high-risk and can actually increase your premiums?  Lying about anything to your insurer can invalidate your policy. But when you have to select pre-prepared boxes with your job description, choosing to tick ‘housewife’ instead of ‘unemployed’ can reduce your premiums. Housewives are safer drivers. 

Where you live (your postcode) can also have an effect on your car insurance. Some areas are statistically riskier with higher crime rates.  A survey by SmartWitness Incident Cameras showed that residents of of some areas in Birmingham can pay up to 7 times more for car insurance than people who live in Aberdeen. In the same research, the postcodes with the highest car insurance (after Birmingham) were in Liverpool, East London, Manchester and North London.  By contrast, the cheapest cities in the UK are Aberdeen, Plymouth, Bristol, Oxford and Edinburgh.

Your driving habits: cheapest car insurance

Car insurance companies are also interested to know what kind of driver you are and the best way to judge this is to look at your driving record. Car insurance companies will look whether you have any points on your licence and whether you have made any claims in the past. 

Your no-claims bonus grows every year that you make no claim. The higher bonus you have the lower premium you pay. The bonus starts at 30% for 1 year of no claims. It increases gradually until it reaches 65% or more after completing 5 years without a claim.  If you have a minor accident and prefer to pay for it yourself so you do not lose your no-claims bonus, did you know that you are still obliged under your contract to inform your insurance company?  Your insurance company may refuse your future claims otherwise.

Another question on car insurance forms is your mileage.  Take time to work this out properly instead of guessing wildly as overestimating your mileage makes your premiums higher.

The make and model of the car you drive also affects the amount of car insurance you pay.  All cars are numbered in groups of 1-50; the lower the number, the cheaper your premiums.  Bear this in mind next time you are buying a new car.  

A Group Rating Panel decides these car insurance groups. Such a panel consists of representatives of the insurance industry such as the ABI (Association of British Insurers) as well as Lloyds Market Association meet on a monthly basis. They use data provided by the Motor Insurance Repair Research Centre (Thatcham) to decide where to categorise each model/make of car. They categorise according to their repair times, costs of spare parts, value, performance and security.

Compare car insurance:

Did you know that you might pay cheaper premiums if you make it more difficult for someone to steal your car?  For example, where you park it as well as whether it has any security devices such as immobilisers or alarms. 

On the other hand, insurers try to penalise drivers who have modified their car in some way.  The website Moneysupermarket surveyed data on 2.3 million cars. They found that turbocharging a car could cause the premiums to increase by 132%. Alloy wheels can add 8% to car insurance. 

Now that you have an idea of which factors insurance companies use to work out your premium, where can you find cheap car insurance? You can buy insurance cover from banks and building societies, supermarkets, department stores, online insurance companies, insurance brokers or from independent financial advisors.  For your own protection, check that insurance advisors are on the Financial Services Register. Never buy insurance through social media sites, in pubs, in newsagents or from motor repair shops. Just as you’d check out any online loan company throroughly before choosing to deal with them, so you should check out any financial company, car insurance providers included.

In order to choose which is the best car insurance policy for you, you need to make a comparison of what is available and how much the policies cost. Online you will find many comparison sites. These give you an estimate of your car insurance premiums. Your car insurance premiums vary according to your personal circumstances and your car.  It is impossible for one calculator to have every single car insurance provider on it. You might want to try different comparison sites to receive a range of quotes.  Be very careful when you fill in pre-filled answers. They may not be applicable if your requirements are non-standard.  Watch out that you are comparing the same things; look for different charges, types and levels of cover. 

Car Insurance Companies  – Be careful!

Here are some things to look out for when you’re comparing car insurance policies

What is the excess?

No insurance company will reimburse any claim 100%.You have an ‘excess’ that you pay before the insurance The higher your voluntary excess, the lower your premiums.

One thing to be especially vigilant about when collecting quotes is that some insurance companies on these calculators set the voluntary excess very high. This means that their premiums come out as the cheapest. Always double-check the amount of excess on the policy.  In general, never make a decision purely on price alone; cheapest does not necessarily mean the best! 

Get many quotes

You should receive at least 3 quotes so you have an idea of what price you are looking at for your car insurance.  Narrow these down to your final choice. If you are renewing your policy, you might be able to go back to your present insurance provider with the quote and receive a discount.

Will you be covered from everything you’ll need?

You should go through a policy checklist before signing any contract with an insurance provider.  Think about what kind of cover you will receive with the policy.  Unfortunately, many policy-holders find out that they are not covered for something when trying to make a claim. By then it is far too late. Look at all of the details before so you will not be left out of pocket. 

Think about all aspects of your insurance cover in case of a theft or accident.  Are your personal belongings covered by your car insurance?  Are you entitled to a courtesy car while your car is being repaired?  Do you have breakdown cover? Can you stay in a hotel if you are stranded away from your home?

The Money Advice Service has a useful list of what good car insurance policies must/should/could have.  Read their checklist on insurance policies here.

Are there extras that you don’t need?

Car insurance comparison

On the other hand, be very careful of add-ons when you apply for insurance. Especially if these extras are things covered by another policy which you already hold.  For example, your home contents policy might cover you for property stolen from your car. Your bank account could cover you for breakdowns. 

Young drivers

We have already seen that young age group pays the highest car insurance premiums. How can you reduce your car insurance if you are a young driver?

One way to reduce your premium is to be the second/named driver on someone else’s policy. The other person should be over 25 and with a good driving record (possibly a parent). This will balance out the risk.  However, as the policy makes clear, you should not be the main driver.  Using someone else’s name to take out a policy if you are in reality the main driver is ‘fronting.’ It is illegal and will invalidate any insurance claims.

Have you thought about taking an advanced driver’s qualification?  They might be pricey to pay for. You could balance the expense of taking the lessons and paying for the test against how much you would be able to save on car insurance in the long-run.

Car Insurance Compare

Why do Car Insurance Premiums rise every year? Considering that the UK has some of the safest roads in Europe, have you ever wondered why car insurance premiums increase so much compared to the rate of inflation?  The Association of British Insurers (ABI) have calculated that car insurance in the UK went up an average of 9.3% from 2015 to 2016. 

One of the reasons for these increases is that complex vehicle technology and the rising costs of spare parts mean cars are much more expensive to fix.  The AA estimates that the average repair bill has gone up 32% in the last 3 years. The way that insurance companies work means that this cost affects all its policy-holders.

Car insurance providers

The government repeatedly increases the Insurance Premium Tax rate.  The insurance sector does not pay VAT. Since 2011 the standard rate for this tax has doubled from 5% to 10% (and is due to rise further to 12% in June 2017); these raises reach motorists as increased premiums.

Insurance providers increase premiums in line with rising whiplash cases. According to the AA, of 800,000 small injuries claims in 2015, a staggering 750,000 involved cases of whiplash; this works out as 1 claim every 60 seconds.  Unfortunately, the pay-outs given to people are paid indirectly by other policy-holders.  The insurance company Aviva estimates that these cases have cost motorists £2.5 billion a year or an average increase of £93 on every premium.  The Ministry of Justice plans to cap the amount of compensation given in such claims and not allow settlement without medical evidence. This should lessen the amount insurance companies – and their policy-holders – pay.

Car insurance online: Reducing your Insurance Premiums

With your knowledge of the insurance industry and tips given in this guide, you now know how to shop around for the best deal. Look out for pitfalls. You know how to be fully covered in case something happens to your car.  This way, you won’t receive any unwelcome shocks when you need insurance the most.

Olly Landsman
Olly is a dedicated member of the Payday Loans Net blogging team. He is committed to his research and providing factually correct information in his articles.

The article "Car Insurance: A Guide to Finding the Cheapest One" was last modified on