Should you pay monthly for car insurance?

Buying car insurance without paying a deposit upfront is possible for some motorists, under certain circumstances. The majority however will have no choice but to pay at least something initially when they buy a policy; this could be as little as 10% of the total premium. A number of price comparison sites offer a choice of multiple policies with low deposits.

However, as well as advantages there are serious disadvantages of extended payment deals, and we will look at these first.

Advantages

We live in a world in which making monthly payments has become a way of life for millions of people, in particular the younger ones. It can be much easier to balance a budget in this way, particularly when money is tight. Paying for insurance on a month by month basis allows much greater control over spending than having to face paying out potentially large sums at irregular intervals.

Disadvantages

The main one is cost. Insurance companies almost invariably charge more for a policy for people who are spreading their payments over a long period, as they would for one which was paid for in full in advance. This is not the only cost factor however. Some of the very cheapest insurers will not accept regular payments; this means that their policies are not available to those who cannot raise the full premium. They may be forced therefore to buy a more expensive policy, or one with less attractive benefits.

There is also the danger that those who spread their payments over the year may find themselves short of cash at some stage, and default on instalments. This could not only, possibly, leave them uninsured for a period, but would also damaged their credit rating. This is important because most insurance companies that offer extended payments carry out a credit check on their potential clients before they make an offer. A bad credit record could mean increased charges at best, and at worst a complete refusal to offer extended payment facilities at all.

Thirdly, there is a danger that some drivers will buy unsuitable policies because they will be concentrating on buying the one with the lowest possible advance payment. This is a particular danger to those buying through a price comparison service, who don't have a chance to talk through their requirements with an experienced and independant advisor such as a motor insurance broker.

Alternative ways of raising the money

Putting the whole sum on a credit card, and paying off the premium monthly, along with the credit card interest, could be cheaper for some people; this would depend upon the interest rate of the card and is something that should be checked carefully beforehand. However, paying in this way would give much greater flexibility; the motorist could choose the best policy available, rather than the one that offered monthly payments! This could make a huge difference to the total cost of a policy, particularly for younger drivers, those with more powerful cars or those with an accident or conviction record.

It is sometimes possible to find a credit card which offers zero interest for the first 12 months; this would be an excellent way of raising the necessary funds, provided that the full sum was paid off within the specified time. Some cards carry quite heavy penalty clauses for those who fail for some reason to meet the repayment schedules, so the terms and conditions should be looked at carefully before making any commitments.

It may be that your existing insurers could offer you a no deposit policy! If you are already insured but your policy is up for renewal, your current insurer may be willing to allow you to continue with your policy and allow you to pay for it on a month–by–month basis, without any initial deposit. Not all insurers would do that but it would be worth picking up the phone and asking them. If you have been a good customer and have made no claims against your policy they may well be willing to be flexible on repayment terms.