Why is it more expensive to pay for car insurance monthly?
Published Sun, Oct 20, 2013 Updated Tue, Feb 16, 2021
Since you receive your car insurance day by day throughout the year, you would think that you could pay for it as you use it, rather than having to pay 365 days in advance at the start of the year, right? Unfortunately, in car insurance few things work in the way that common sense would suggest.
There are a number of reasons for this:
Firstly, insurance policies are packaged as a single product which you must purchase and in that respect you are expected to pay in full to buy a policy which will then cover you between the agreed dates. This is similar to how you would pay to watch a film (at the cinema) before the film actually started. Of course, you generally pay only moments before walking in, and the film lasts for 2-3 hours rather than 365 days, but the logic remains. The other reason of course, is that insurance companies can charge in this way, and doing so is better for them financially. Receiving premiums in advance allows them to plan their finances more easily and mitigates against the risk that you will default and be unable to pay 6 months down the line.
When you choose to pay monthly, you are actually taking out a credit agreement. Often the credit is given by another company and the premium is in fact paid in full by the creditor. For this reason, you are in effect borrowing the money to pay the premium, and your monthly payments are not paying for the insurance, but paying off the debt. As with any other debt, you are charged interest on this loan and that is why the total amount paid back is more than the initial premium.