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UPDATED: Mar 13, 2020
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Car insurance can be a hefty expense for some, especially when you pay for your policy all at once. Breaking your car insurance premium into a downpayment and several monthly payments is one way to spread the expense out over time.
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Different insurance companies have different payment policies and requirements. These requirements are based on several different factors that you may or may not be able to control.
Generally, an initial payment is required to start your car insurance policy. As your car insurance policy is a legally binding contract, that payment is required to formalize the contract. A deposit payment is needed to seal the deal so to speak. Without it, your auto insurance policy is not active.
Car insurance payment options have certainly changed over the years. A yearlong policy used to be the standard, and your payments could be broken into one larger initial payment and 11 additional monthly payments.
However, as consumer laws began to restrict the ways and reasons why a car insurance company could cancel your insurance contract in the middle of your policy, car insurance providers began to utilize shorter policy lengths. Usually, a six-month policy is much more common.
A six-month policy allows car insurance providers the opportunity to drop high-risk customers much sooner.
All the insurance providers have to do is refuse to renew your contract after the six months is up. Car insurance companies will likely refuse to renew your insurance policy if you have had too many violations, too many accidents or serious convictions, such as DUI.
You can certainly pay your six-month policy all upfront, but many do not have the cash on hand to make such a payment. The full amount of the premium might be required all at once if you have had lapses, bounced check payments or other payment issues with your last car insurance policy. Six-month insurance policies can usually be broken into one bigger deposit and five smaller monthly installment payments.
Another option is four months of installment payments, with the first being a larger payment; then, you have two months without payments. There are also month-by-month insurance policies, and your deposit would pay for your entire car insurance policy for just a month. Typically, car insurance companies are much more likely to offer installment plans that get them their money faster, such as breaking your payments in two, rather than installment plans that span a six or twelve-month period.
The payment schedule of each car insurance company will vary depending upon company policies. Some insurers use monthly installments as an incentive for customers to utilize preferred payment methods, such as payments that are scheduled by electronic fund transfers, or EFTs. EFT payments make it more likely that an insurer will get their payment, as EFTs can be difficult to cancel.
Typical initial deposits will also vary depending upon if you are a new or renewal customer, or if you have had a lapse in insurance coverage. The Massachusetts Office of Consumer Affairs and Business Regulation lists the typical premium requirements of various car insurance providers in the state.
Payment schedules vary from company to company depending upon the length of the policy, the total number of installment payments, whether the customer is new or current and if the insurance policy is for a consumer or a business.
The total amount of the first payment required by different insurers ranges from 8% of the total premium to 50% of the total premium.
State Law and Downpayments
The range of payments offered will also vary from state-to-state. Some states have laws and regulations regarding what car insurance companies in that state can or cannot charge for an initial fee. These laws and regulations are aimed at protecting the rights of consumers.
For instance, the regulators at the Texas Department of Insurance lists payment plans as one of the rights that Texas drivers have. In Texas, drivers have the right to utilize an array of installments; essentially, no insurance company in Texas can require the entire premium upfront. Furthermore, a downpayment cannot be more than the cost of two months of coverage.
For another example, in Massachusetts, an insurance company cannot require that you to pay an initial payment of more than 30% as long as you have made your past payments on time. Some states, however, do not have any such laws or regulations. Look for your state’s department of insurance to view your rights as a driver with the map provided by the National Association of Insurance Commissioners.
Benefits of a Downpayment
Premium deposits have many benefits. The greatest benefit of a deposit is that you can stretch your car insurance premium payments over a longer period of time if you are unable to afford to pay it upfront. Not everyone has hundreds of dollars to pay a one-time, lump-sum payment for their car insurance.
Downpayments are especially practical if you have a yearlong policy that can be more than $1,000. Far fewer people would be able to afford car insurance if a premium was required to be paid all at once. Making car insurance more affordable is a valuable way to ensure that there are fewer uninsured motorists on the road. With the wide array of payment options that include a deposit and subsequent installments, most people should be able to find an affordable option for auto insurance coverage.
Drawbacks of a Downpayment
There are some downsides to the installment schedule, however. Most car insurance companies offer a discount for paying your insurance policy in full, and utilizing an installment schedule will make you ineligible for this discount. Some insurers even charge a convenience fee for paying in installments.
Spacing your payments over several months also makes it more likely that you will forget a payment. Most car insurance providers do not offer a payment grace period, so it is very likely that you could be driving without insurance and not know it if you forget a payment.
Furthermore, many car insurance companies require that you enroll in scheduled electronic funds transfers to be eligible for a schedule of payments.
Many find this to be an intrusion of their privacy; though some feel it is a good way to ensure they never miss a payment. EFT payments can be hard to cancel as they take a few weeks to start or stop. Additionally, if you are overcharged through a mistake, it will take some time on the phone and a few days to put things back the way they were.
Scheduled EFT payments require that you always have enough money in your bank account. If you do not have enough funds in your bank account, then you can bounce a payment or receive an overdraft fee from your bank. EFT payments require that you keep a much closer eye on your finances.
Ways to Lower Your Downpayment
You can lower your first payment in a number of ways. The easiest way to lower it is to opt for the greatest number of installments. This means finding a car insurance company that will allow you to make monthly payments on a six-month or 12-month policy. Obviously, a 12-month policy will likely have the lowest installments.
Another way to lower your car insurance premium installments is to lower the overall cost of your car insurance. There are many ways to lower the cost of insurance coverage. The first is to improve your driving record. You can do this in the long term by driving in a safer manner; in the short term, try taking a driving class that is approved by your state’s department of motor vehicles.
Another way to improve the cost of your car insurance is to improve your credit history. This will also make it more likely that you will qualify for the most options for installments.
Car insurance companies are less likely to offer payment options to those with poor credit histories.
The experts at the Insurance Information Institute maintain that having a good credit record will allow you to garner lower car insurance rates.
You can also try to bundle your auto insurance policy with other insurance policies, such as a business insurance policy or a homeowner’s insurance policy. You can also install anti-theft devices or try to reduce the number of miles that you drive in your vehicle to try to save on your car insurance premium.
Furthermore, you can also look for further discounts such as multiple car discounts, safe car discounts and good student discounts. Obviously, if you want to pay in installments, then you can’t get the paid-in-full discount, but there are many other discounts that you likely qualify for.
Of course, the best way to lower your car insurance premiums is to compare prices from many different companies to find the lowest rate for the same amount of insurance. Get many quotes, and remember to inquire about the different payment options that are available to you!
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