Payment Plans can Increase the Cost of Your Auto Insurance
Paying your car insurance bill in monthly installments might seem like a smart way to budget, but you could spend more over a year for the convenience of paying month by month.
An informal check of car insurance rates for one Florida resident found that over the course of a six-month policy, it could cost her up to $141 more - or $23.50 each month - to pay her bill using monthly installments, rather than making a single payment.
"It's a good example of how the poor pay more" for services like auto insurance, says Linda Sherry, spokesperson for Consumer Action, a consumer rights advocacy group. Those who live paycheck to paycheck typically have no choice but to pay their insurance bill monthly, while those who are better off can afford to plop down the full payment.
Even drivers who might be able to pay their premium in full "might not really think in terms of their annual expenditure," she says, and instead opt to pay month by month.
Even if a policy costs only $500 or $600 per year, "how many people really have that kind of cash lying around?" Sherry asks.
Auto insurance fees quickly add up
Having the option to pay your car insurance policy in installments often raises the amount you ultimately pay, but it does provide a necessary alternative for those who can't afford to pay their bill in full.
"There is some benefit, especially in this rough economy," says Chris Hackett, director of personal lines for the Property Casualty Insurers Association of America. "It's an option for consumers who can't afford an upfront premium."
In addition, for a customer who is habitually making late payments, setting up a monthly electronic funds transfer from a bank account can prevent a lapse in auto insurance coverage, Hackett says.
A harsh reality
Not being able to pay an auto insurance bill in full is "probably a reality for a lot of people," says Tracy East, director of outreach with the nonprofit Consumer Education Services Inc.
In our car insurance quote sample, we found that paying upfront for a six-month policy, rather than in installments, resulted in huge variations in costs. With one company, the savings was $82 over six months. For another, it was a modest $17.
USAA, which provides insurance products and financial services to American military members and their families, doesn't charge a fee for members to pay their bills in installments, a spokesperson says.
Extra charges for paying online
Many insurers have a variety of ways to bring in extra cash, such as charging a couple of dollars extra per payment, depending on how you pay (online, via electronic funds transfer or other ways). Fees vary by company.
Some car insurance companies charge extra for installment payments in order to cover additional administrative expenses, Hackett says. Fees can also vary by state law, and some state departments of insurance may set limits on how high those fees can be.
If you want to avoid the extra cost of paying in installments, plan ahead, says East. If your car insurance bill is $800 a year, set aside money each month in a savings account so that "when your bill comes due you can pay it outright."
The original article can be found at Insure.com:Payment plans can increase the cost of your auto insurance