Pay As You Go (PAYG)

Pay-As-You-Go (PAYG) Car Insurance is a relatively new and innovative insurance option, designed for drivers who do not use their car as much as other people. This specific form of insurance is usually a form of fully comprehensive cover, but you pay for insurance as and when you need it rather than purchasing a regular policy which is valid at all times.

In order to enable PAYG insurance, your car will be fitted with a Global Positioning System (GPS) device. This electronic device can pin-point exactly where you are on Earth using a global navigation system supported by a network of extraterrestrial satellites. You may be required to pay for the cost of installing the GPS device in your vehicle, but this will be a one-off charge. Your insurance company uses your GPS record to determine where and when you drive; each journey you make is timed, measured, and the location recorded. At the end of each month you receive an itemised bill (much like your telephone bill) instead of paying an annual premium.

The cost of your journeys is calculated based on a variety of factors. For example, journeys during the day (6am-11pm) are considered less risky, therefore you may only have to pay five pence per mile as opposed to as much as one pound per mile during the night. Charges are also likely to increase during peak times, such as rush hour. Some insurers may even take the roads you drive on into account: you may only have to pay, for example, half a penny per mile on a motorway but three pence per mile on a 30 mph road.

You will be given details of your insurance provider's tariff when you take out the policy, and it will also be detailed on your 'schedule': the personalised policy booklet you receive with your insurance documents. You may be entitled to a number of free miles when you take out the policy, or a certain number of free miles each month. In addition to the journeys you make, you may be required to pay a flat-rate monthly fee to cover the cost of insuring your car against theft and fire whilst not in use.

The one disadvantage of this system is that you will not be insured by your policy if you drive anybody else's car. Typically, fully comprehensive insurance will cover third party liability in the event that an accident occurs while you are driving someone else's car. However, PAYG insurance cannot cover you for driving someone else's car because it is calculated based on how and when you drive your own car and the risks you take whilst doing so.

Recent reports suggest that pay-as-you-go car insurance will most benefit drivers who rarely use their car, and young drivers whose lack of experience means that they are considered to be more likely to have an accident and therefore face larger premiums. If however you use your car each day and/or drive long distances each month, often at peak times, you are likely to find a regular policy less expensive.