Paying by instalments is a poor alternative

It is a depressing fact that all too often it costs more to have less. And sometimes it costs a whole lot more.

If you have bundles of money sloshing around in your bank account and can afford to pay your motor tax in one go you will save yourself over 10 per cent. The cost of the insurance needed to keep that car legally on the road, meanwhile, will fall by as much as 20 per cent if you can stump up whatever the premium is once a year rather than having it drip feed from your account once a month – hopefully on a day which comes just after pay day when you still have money to spend.

And if you can afford to buy a brand new high-end, clean-engined German car your motor tax bill is probably going to be less than your neighbour who is struggling to keep their 10-year-old runabout on the road.

It emerged last week that a growing number of people are being forced to pay their motor tax every three months because they don’t have the cash to pay once a year. In 2012 there were more than 100,000 more quarterly tax licences issued than two years earlier, while the number of annual discs being issued fell sharply. It is not hard to see why.

Tax rates vary quite significantly from car to car but if you pay €710 annually you will have to pay €394 if you pay it twice a year and if you have the temerity to pay every by the quarter it will costs you €200 – or €800 annually – a premium of more than 10 per cent. Add to that the risk that by paying quarterly you may end up missing the deadline for payment – and that danger is 300 per cent higher because you are paying four times as opposed to once each year. If you do miss the tax deadline on a tax band of this nature it will end up costing you over €50 more.

'Poorer people'
The higher charge for quarterly payments "disproportionately hits poorer people," says the AA's Conor Faughnan. "Historically it was perhaps justified because there was a significant amount of additional paperwork associated with quarterly payments but with most payments now done online does it really cost an additional €90 to look after quarterly payments? I don't really think so."

Faughnan also highlights another way poorer motorists are being hit disproportionately. In 2008 the government changed the motor tax rules and based the tax band on emissions rather than engine size. All good? Not really.

There was no future proofing of the rules which means that the proud owner of a 131 Beamer or Merc could well be paying less motor tax than someone driving a banger with the same-sized engine which they are only driving because they can’t afford anything newer. “It rankles with any notion of natural justice that it should be this way,” says Faughnan.

But we digress. Back to the instalment payments. With so many such transactions being processed online it is hard not to agree with Faughnan's notion that the admin charges must be minuscule. So why penalise those who can't afford the lump sum payments? The good people in the motor tax office are not alone. There are a lot of businesses which charge more if you spread your payments out over the course of a year. Aon Insurance had a motor insurance rate advertised on its website last week of €226 but if a person paid in a lump sum the cost would have fallen to €212, a saving of just under 10 per cent.

Liberty insurance is another company which tries to incentivise people to pay their premiums up front – or alternatively – tries to penalise them if they don’t. “Our easy monthly payment plan allows you to spread the cost of your car insurance,” its website says.

“When you get your online quote, you will have the option to pay your car insurance premium in one lump sum, or, if you prefer your insurance can be spread out over the year by paying a 20 per cent deposit and 10 monthly instalments by direct debit.” However, the service charge for using the monthly payment plan is 6.67 per cent, which might not sound like a huge amount, but it has an APR equivalent of 19.66 per cent, a higher rate than many credit card companies charge.

So, if you were on a rate of 16 per cent with your credit card company, than you’d be as well off paying it in a lump sum with that and then clearing it over the next 10 months despite the fact that it sounds so counter-intuitive.

At least the insurance companies have a better excuse than some spurious notion of high admin charges. Even if premiums are paid in instalments, the company involved actually considers the charge paid up front and so is effectively loaning the money out. As with all loans there is a risk of default and industry sources say one factor which explains the high cost of the financing is that some people only pay their monthly premiums for the first four months after which they stop paying but retain their cover for the full year. While this may be the case, Pricewatch does not buy the notion this fear of default could be behind an APR of 20 per cent.

It is possible for people, even those of humble means like Pricewatch, to pay all the big bills in lump sums but it does take planning and you may need to start planning this year for next year's bills. First open a separate bills account and start putting whatever money you can into it – any presents, any bonuses – and make sure to stagger your bills so they fall due at different times of the year.

Direct debit
Set up a direct debit from your current account into the bill account and start paying monthly into that so when the bills fall due the money is there to cover them. But that assumes you have money. And too many of us don't. And if we don't we are penalised by our banks. Not long ago, the Central Bank reported that the highest fees and the highest current account costs occur when consumers have high numbers of out-of-order transactions on their account such as unauthorised overdrafts, unpaid direct debits and over-limit or referral fees.

The average cost to the consumer for running a current account where everything is in order all the time is €86 a year. The average yearly cost if your finances are a bit of a mess is €231.