Most car insurance companies allow drivers two payment options: pay monthly or make one annual payment. Consumers need to carefully decide which option is best for them. Making monthly payments is generally more expensive because of interest charges, but does allow for considerable flexibility. Paying your car insurance annually is easier in many respects. Once you have paid your upfront insurance rates for the year, there is piece in mind in knowing that there shouldn’t be any surprises such as non-sufficient-funds fees. Paying annually is often one considerable payment, but it does free up your cash flow for the rest of the year.
This article will offer a road map for navigating your auto insurance payment schedule. We shall give you a glimpse into the advantages and disadvantages of monthly payments versus annual.
Pro: Easier On Your Monthly Budget
If you’re like most people, you manage your finances with a monthly budget. Your income is offset by your bills; funds that are left over are allocated toward entertainment, investments, and other outflows. Under this budgeting system, making a large upfront payment for year-round coverage may prove unmanageable. This is especially so in today’s economic climate.
Your monthly insurance payments will fit nicely in your budget. Because you already know how much these payments total and when they are taken out, you can include these in your budget.
Con: It’s Inconvenient
Paying your auto insurance premiums on a monthly schedule increases the paperwork you’ll be forced to manage. Besides all of the excess mail you’ll receive, you’ll also carry all of the costs associated with the monthly cheque writing.
On the other hand, many auto insurance companies can help you establish an automatic payment plan. The funds are drafted directly from your checking account on a predefined schedule. That reduces your paperwork and eliminates the need to remember to write a check each month.
Pro: Provides More Liquidity
If funds are limited, there’s value in having the option to hold onto your money for as long as possible. Monthly car insurance payments provide valuable liquidity. For example, suppose part of your monthly budget is allocated toward making a small investment into mutual funds. If you were forced to pay several hundreds of dollars upfront for an annual car insurance policy, you might lose the liquidity necessary to make your monthly investments.
Con: Includes Processing Fees
Most auto insurers will charge a small monthly fee to process your payments each month. These processing fees are typically small; it’s not uncommon for them to be as low as a few dollars each month.
Over the course of a year, the fees can add up to $50 or more depending on your policy. While some financial planning experts suggest that paying such fees is an ill-advised way to spend money, it depends largely on your personal circumstances. If funds are unlimited, the experts are correct. This small fee may be worthwhile considering the liquidity this arrangement offers.
Pro: More Flexibility
Making monthly payments gives you far more flexibility to change car insurers than would be the case if you were to pay upfront. This is more important than many policyholders realize.
Auto insurers are constantly trying to gain market share. The most common justification to switch is cheaper insurance rates. It’s a good idea to comparison shop for insurance, and compare your rates with other providers. Even if you’re satisfied with your current auto insurer, you might find a policy that offers more attractive terms. For example, you may discover the same level of coverage with lower rates at a different insurer. Or, you might uncover better coverage for the same rate you’re currently paying.
If you’ve pre-paid for your insurance and then cancel, you’ll need to wait for them to return the balance on your account. The problem is, you’ll need to wait for the check, which can take weeks. It might be necessary to make a deposit to your new insurance company, which might be troublesome while waiting for your previous refund. It’s much simpler to cancel your coverage and switch providers when you’re paying for your insurance coverage monthly.
Choosing The Right Payment Schedule
You are the only person who can decide whether paying for your auto insurance on a monthly schedule is appropriate for your situation. Review your monthly budget. Determine the value you place on liquidity. Don’t underestimate the convenience of being able to switch insurance companies should you find a better rate for your desired coverage. A little upfront planning can help you avoid headaches down the road.