How to pay for auto insurance premium
When you want to buy your auto insurance policy, one of the decisions you may need to make is how to pay the insurance premium. Some insurance companies will give you options for payment. You can be allowed to pay monthly, quarterly, half yearly or annually while some will only allow annual payment. For the insurance companies that only allow annual payment of the auto insurance premium, you may not have other option than to comply. However, the only option you have may be to shop around for the insurer that will allow you to make instalment payments. Perhaps you so much prefer the services of the insurer that only allows annual payment and you have limited resources to pay upfront, there is a way around it. I will share how you can go about it later in this article.
Firstly, I want us to look at the two options for the payment of auto insurance premium. The two options we are considering here are annual payment and instalment (monthly) payment.
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Annual Payment
The most popular payment option among car insurance companies is annual payment. Annual payment means that you have to pay the whole insurance premium at once at the beginning of the year. However, your policy may not run from January to December. If this is the case, you will need to make the bulk payment at the beginning of any time the policy takes effect. One thing you need to know about auto insurance is that, if you don’t pay your premium, it means there is no policy. That is, no premium, no coverage. Why would you like to choose annual payment option? Annual payment may be the only option available to you. If your insurer does not offer instalment payments, you just have to make the upfront payment. One major benefit of annual payment to customers is that it is cheaper than when you make monthly payment. Some insurers offer discounts on annual payment option. But this option is only good for people that have enough income to pay upfront. The burden of making a large disbursement for the payment of auto insurance premium at once may be less if the payment coincides with when you normally receive bonus or rental income. Insurance companies can afford to give discount on annual payment option because of two main reasons. It costs less in term of administration. Secondly, the insurer can earn income on the premium if invested. Even if the premium received is not invested, the insurer can utilize the money to funds its operations. This means that the insurance company may not need to borrow fund to finance its business. Therefore, there will be no need for interest payment.
So, if you have money to make upfront payment, it is actually worth it. You will not only enjoy discount, you will have the privilege of shopping around as many insurance offer annual payment option. You will be able to compare quotes. This will ensure that you get your auto insurance at a good rate. Also, yearly payment will save you the hurdles of keeping to payments every month. For people who cannot easily keep to payments, annual premium payment will be ideal. With this, they will be able to avoid late payment fee. The downside is that, it is only good for people who have enough money to pay at once. The reality is that, some people don’t have the money. Car insurance premium can be very expensive especially if you are young and inexperienced. Even if you have the money to make annual payment, you may need to consider the opportunity cost of the premium you will be paying upfront. If there is an investment opportunity to deploy the cash; it may be worthwhile to opt for monthly payment. Another disadvantage is the problem you may encounter if there is need for cancellation. Supposing you want to travel abroad after you have paid for your car insurance premium, you may be required to pay cancellation fee.
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Monthly Payment
Monthly payment option requires that you pay your auto insurance premium every month. That is, the premium will be paid over a twelve month period. You may be required to pay higher amount in the first month while the balance is spread over the remaining eleven months. If you choose monthly payment plan, you may end up paying more. Insurance companies normally charge fee to cover their administration cost. It costs more to manually process the monthly payment. Insurers are also faced with risk of defaults from their customers. Therefore, the insurer will like to check your credit before you can be allowed to pay your auto insurance premium monthly. This option is actually good for people who don’t have enough income that can afford them to make upfront payment. Although it can be more expensive, you will be able to spread the payment in such a way that will not affect your cash flow too much.
I hope you don’t forget what I mentioned at the beginning of this article. I said that there is a way you can turn yearly payment into monthly payment even when your insurer will not allow you. It is possible that you are comfortable with your insurer except for the yearly payment option they offer. If this is the case, you may not need to change to another car insurance company. What you just need to do is to pay the insurance premium with your credit card and then pay the off the card balance in instalments. However, you need to ensure that the credit limit on the card can accommodate the payment. Nevertheless, you need to remember that you will pay interest on the card balance. The burden of interest payment on the card balance can be offset to certain extent by the discount you will enjoy when you make annual payment. Another way to reduce or eliminate the payment of interest on the card balance is to use 0 purchase credit card to pay the premium. What is 0 purchase credit card? A 0% purchase credit card is the type of credit card that allows you to buy things upfront, while you pay off the amount involved over a set and stated period without any interest. This is actually a smart move. With this, you will be able to enjoy discount by making annual payment. At the same time, you will avoid the payment of interest or fee that comes with monthly payment option.
Monthly payment plan is not only for people who don’t have money to make upfront payment. Some people deliberately choose monthly payment plan for their auto insurance premium because they want to invest the money elsewhere. If you have investment opportunity where you can put in the money to yield higher returns than the charges you will need to pay on monthly payment plan, this is okay. Don’t forget that you can reduce the charges you pay on monthly payment by setting up automatic payments. Insurance companies do offer discount to people who set up monthly direct or automatic deposits for the payment of their auto insurance premium.
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Do I pay for my auto insurance monthly or yearly?
You may then ask that, which one is better between yearly and monthly payment of auto insurance premium? Everything depends on your situation. You can’t say that you will choose monthly payment because that is what your friend chose. It doesn’t work that way. You need to understand your financial situation and then choose the option that suits you. It is possible that your friend chose monthly payment option because he doesn’t have enough cash to make upfront payment. If you can afford to make yearly payment, why not take the opportunity of the discount involved? One of the best decisions you can make in managing your finance is not to do things because you see other people doing it. Personal finance requires personal planning. If you don’t know the step you need to take regarding your finance, you should endeavour to consult a financial planner. He will be in a better position to advise you instead of you just following the multitude.