Guide To Pay-As-You-Go Car Insurance

For many drivers, traditional car insurance involves paying for an annual policy every year after a heartfelt moan that premiums have gone up yet again. 

The more savvy among us will shop around for a cheaper quote before punching in our bank details, yet even once we’ve found a lower price, it’s likely to still be a fair chunk of money to be forking out every 12 months.

But what if rather than a single one-off lump sum, we paid for the miles we drove or the time spent behind the wheel? This is where pay-as-you-go (PAYG) car insurance comes in, as our guide explains…

What is Pay-As-You-Go car insurance?

PAYG car insurance is a catch-all term used to describe non-traditional car insurance, so it’s important to understand exactly how the definitions differ.

First, it can be another name for telematics or ‘black box’ insurance. This type of insurance uses smart technology to monitor driving habits and is typically taken out by younger drivers as a potentially low-cost alternative to standard motor insurance. 

It’s a way for drivers to prove they are responsible behind the wheel before they have actual experience and a claims-free record. Over time, premiums will adjust to reflect driving habits.

But true PAYG car insurance is also now offered by some innovative insurance companies who charge per mile or per hour, which – as the name suggests – means you’ll be charged specifically based on how far or how long you drive. 

As technology evolves, expect to see more insurers offering PAYG as an alternative to a flat annual premium.  

How does PAYG car insurance work?

PAYG car insurance is typically made up of two parts. The first is a set monthly or annual charge to cover fire and theft and to meet your legal obligation for your car to be insured at all times. You won’t always be on the move, so will need your vehicle to be insured when it’s parked.

The second part is the PAYG element. Here the insurer uses smart technology to charge you for the miles (or time) you clock up and you’ll be charged monthly. The technology can also monitor how safely you drive, which is fed back to the insurer and could be reflected in the price going forward.

Premiums are determined by factors such as your driving history, your car’s make and model, where you live, where you park at night, and even your job, as well as how much you use the car.

Policies are usually on a rolling contract so – unlike annual policies – you can cancel at any time without incurring fees, but you should check the terms and conditions to be sure.

How does the tech actually work? 

It’s a fast-evolving area but, for example, a SIM card in a black box fitted to the car contains GPS and motion sensor software to transmit your driving data to your insurer. 

Along with your mileage, it will measure acceleration and braking, cornering speed, where you drive, how often, and for how long, and if you take breaks. It’s often linked to an app on your mobile phone, and some insurers will offer discounts and rewards for drivers that demonstrate safe road behaviour. 

Can I benefit from PAYG car insurance?

Whether PAYG car insurance is a better option than traditional annual car insurance will depend on your individual circumstances. If you’re a young driver or if you’re a driver who doesn’t clock up many miles, then it could be a cost-effective option. 

You could also benefit if you drive outside rush hour, as some insurers charge less for miles driven when the roads are emptier and accidents less likely. Those with driving convictions who have seen a hike in their annual premiums might also find a PAYG policy can save them cash. 

The key is to understand your own driving habits – particularly with regards to how far you drive in a month. This will allow you to compare potential costs of PAYG cover against annual premiums.

Generally, if you drive no more than 6,000 miles a year, then PAYG might be worth considering. But you should run a comparison of traditional policies to make sure.

What are the different types of cover available with PAYG car insurance?

PAYG car insurance is often only offered as fully comprehensive, but not always. As with traditional cover, some providers might also give you the choice of third-party, fire and theft, and third-party only – the minimum amount of cover legally required. 

Note that, although a PAYG insurer may only offer fully comprehensive cover, this doesn’t necessarily mean it will be more expensive. As with all car insurance, it’s worth doing a comparison between the types of cover before making a final decision.

Is PAYG car insurance the best option for a young driver?

Young drivers – those under 25 – tend to be seen as high-risk by insurers because they are less experienced on the roads – and this can bump up annual premiums significantly when you first pass your test.

PAYG insurance in the form of telematics of black box insurance gives you the chance to prove otherwise and help reduce premiums sooner than would otherwise be the case. If you get ‘true’ PAYG cover it enables you to just pay for what you use.

While this sounds ideal, the reality may be slightly different. Even if you’re only an occasional driver, it doesn’t necessarily mean you’ll get hugely discounted premiums. You still have the fixed part of the policy to pay, which for a young driver with little experience on the road, can be high.

How do I pay for PAYG car insurance?

Because the amount charged per month will change depending on how much you drive, PAYG contracts are usually rolling monthly contracts with no cancellation fees. 

This can be an additional attraction for some drivers, who may not want to insure their vehicle for a full 12 months because of changing personal circumstances. But remember – your vehicle must be insured at all times, even when parked-up on a drive-way or in a garage.

The only way to avoid having insurance is to get a Statutory Off-Road Notification (Sorn) from the government. Details here.

When can’t I get PAYG car insurance?

PAYG insurers might not cover vehicles with more than seven seats, that operate as a commercial taxi, are worth more than £40,000 or are over 15 years old.

What other options for car insurance do I have?

Rather than PAYG insurance, if you’re an infrequent driver, you could plump for temporary or short term car insurance. It covers you for a fixed period, typically up to 28 days, and can be ideal for borrowing a car, test driving or driving a new vehicle home.

What are the pros and cons of PAYG car insurance?

Advantages…

• only pay for what you use – offers potential savings if you drive infrequently
• cancel at any time – there may be a notice period, but PAYG deals typically don’t have the cancellation fees you find with traditional annual contracts
• smart tech for lower premiums – if the information fed back to your insurer shows you’re a responsible driver, your insurance quotes could be cheaper in the future  

Disadvantages…

• monthly fixed rate – there’s still a premium to pay to insure the car to be on the road – even if you don’t start the engine. So, while the principle might seem sound, an annual policy may still work out cheaper.
• the more you drive, the more you pay – while you’ll know this before you take out the policy, circumstances can change and, if you have to make several long journeys, you could end up paying considerably more overall.