Many drivers choose the convenience of monthly or quarterly payments over a large annual premium. However, consumers need to understand exactly what they’re paying for in order to make an informed choice. Here are some of the things you should consider when making your insurance decision.
You Pay More for Convenience
Insurers charge more for installment payments for several reasons. They must collect and process multiple payments, which drives up their administrative costs. Additionally, there’s no guarantee a driver won’t cancel their policy mid-term, which they consider higher risk. Insurers increase your monthly or quarterly payments to compensate for these issues, and these fees are largely unregulated.
The APR Might Be Higher Than You Realize
Insurance companies also charge you interest for choosing installment payments. They consider it a loan. However, most consumers don’t realize how much they’re actually paying.
For instance, a policy might cost $1,000 if you pay annually, or you could pay two $520 payments instead. You decide to pay the extra $40 thinking that’s 4 percent of $1,000 – not bad, considering the convenience. However, you’re actually paying much more.
The insurance company receives your first payment of $520, and then charges you $40 interest on the balance of $480. That $40 interest on $480 is an APR of 8.33% ($40/$480) for half a year, or 16.7% annually. That’s higher than many credit cards and certainly higher than a personal loan. Use this calculator to determine how much you’re paying now.
Missed Payments Can Have Severe Implications
Paying monthly can be handy when you’re on a budget, but don’t miss a payment. Typically, an insurance company will charge you a stiff penalty and they may even cancel your policy. A cancellation can make it harder to find insurance and can lead to higher rates. You’ll also drive without coverage until you discover the cancellation.
Full Premium Reduces Your Cash Flow
When you pay your full premium, you’re paying for the months ahead. Its money out of your pocket and into the coffers of the insurance company before you drive and before you could file a claim.
While you may not earn much interest on your money if it stays in your bank account, when you spend your money to pay your full insurance premium you may not have an emergency fund when you need it. However, if you’re sitting comfortably, paying your full premium will save you money in the long run.
Finding Middle Ground
Some insurance companies offer discounts if you agree to electronic funds transfers as it lowers their risk. Alternatively, you may be able to pay part of your premium and then choose installment payments for the balance.
Working with an experienced independent insurance agency is the best way to find what works for you. Not everyone wants to pay their full premium, but that doesn’t mean you should pay high interest and fees just because the company offers installment payments.
Your agent will compare policies, find those with best coverage and terms, and save you money. They can also bundle your auto insurance and home insurance for further savings, and explore discounts too. It doesn’t make sense to shop online for the lowest price, when an industry expert can meet or beat online prices with superior coverage.
