Should You Pay Car Insurance in Installments?

Many consumers aren’t content to pay a lot of money for car coverage. They want to know if they can afford monthly car insurance.

Long ago, auto insurers discovered that consumers are more likely to purchase a policy if they can afford their car insurance monthly and quarterly than if they have to pay the entire premium upfront.

The fractional payment option usually comes with fees to cover.

  • The “carrying costs” for the insurer of delaying collection.
  • Administration costs associated with generating and processing multiple payment payments.
  • There is a possibility that fractional payers might stop paying in the middle of the term.

These fees won’t be spelled out if your car insurance is paid in installments. Insurers will spin it and offer a discount if your payment is in full.
Many companies offer discounts to policyholders who pay their monthly car insurance payments online or by direct deposit. You’ll likely see discounts if you choose a path that guarantees — or almost guarantee (e.g. autopay) that your money will be received on time.

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Compare quotes to save on auto insurance

You may want these discounts but what if it isn’t possible to afford the full amount right away? Auto insurance installments are very popular in these situations. The fees are not the only problem. You could be charged a penalty if you are late in paying your bill. Failure to pay could lead to policy cancellation, higher auto insurance rates, and even suspension of your driving license.
You might be asking, “Can I pay my monthly car insurance?” The answer is often yes. It is important to consider all options before you decide to pay your car insurance in installments.

Fractional payments: The real cost

Although car insurance monthly payments can prove to be a win-win situation for both policyholders as well as insurers, there are still concerns about whether consumers are miscalculating the true cost or if insurers are charging too much for convenience.

Joseph Belth is a professor emeritus at Indiana University in insurance and the long-time editor of “The Insurance Forum.” He has been fighting for better disclosure of fractional premium costs since Congress passed the Truth in Lending Act (TILA) in 1968.

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This law, which required lenders to post credit terms for consumers, also established the annual percentage rate (or APR) as a simplified disclosure standard.

Belth claims that policyholders are free to calculate the interest they are paying because TILA didn’t require insurers to reveal the cost of fractional premium charges.

How is APR calculated?

Auto insurance policies are typically sold in six month terms. For simplicity, let’s assume you have a 1-year policy costing $1,000 if you pay in whole, or $520 twice per year. The semi-annual payments would add $40 to your annual premium. This would make it appear that you are being charged 4 percent interest by adding it to your $1,000 annual premium.

“Wrong, W-R-O-N-G,” says Belth. This is because the APR for car insurance in this instance is 17 percent.

Here’s how he and others view it: $40 allows you to use $480 for half of the year. The $480 represents the $1,000 annual cost of insurance, minus the $520 semi-annual payment. Divide $40 into $480 and you get a semi-annual interest rate equal to 8 percent. You can round that to get an APR for car insurance of 17 percent.

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Belth claims that the common mistake of arriving at 4 percent distorts fractional premium payments’ true cost.

He says that the correct interest rate will be approximately twice as high for monthly premiums than it is for quarterly premiums. Semiannual premiums will be three times as high, and four times so high.

Insurer considers upfront payment a loan

Amy Bach, the executive director of United Policyholders (a San Francisco-based insurance consumer organization), says that consumers who pay their car insurance in installments should not be considered borrowers. She claims that consumers who pay their premiums in advance are lenders when they do so.

She says that they are asking her to pay a year’s worth of expenses to fulfill their commitment. “I’m paying January for April and July for November.”

Bach does not deny that insurers have the right to charge reasonable fees to cover their costs. She maintains that consumers should know the true cost of paying on-time, especially for auto insurance which is required by law to be able to drive a car in most states.

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She says, “I don’t like the fact that auto insurers have a captive market, almost all charge installment fees because it is possible: You must purchase it.” This is because low-income people can’t afford to pay a lump sum.

Fractional fees are not regulated in large part

Glenn Daily, an insurance advisor who charges a fee only in New York, believes the problem is not with fractional premium fees but rather the state’s lack of regulation.

He agrees to Belth and Bach, that consumers don’t get the information they need in order to determine the cost of car insurance installments.

Daily states that APR is inappropriate when making financial decisions.

He isn’t convinced that disclosure would be enough to change consumer behavior.

He says that consumers ignore the APR especially for credit card. “A person should at minimum be informed about the interest rates for all fractional premium modes, and allowed to make their own decision.”

Other payment options for insurance

You might consider alternatives to monthly car insurance payments if you don’t want the APR hidden on your car insurance. There are many options available to you to make your car insurance payment as easy and affordable as possible.

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Semi-annual or quarterly payments

There is a middle ground between paying upfront for car insurance and making monthly payments.
You can usually choose to pay your car insurance premium on a semi-annual or quarterly basis. Many insurers offer discounts for this option, as they receive larger sums of money and require less administrative work.


Ask your insurance company if they offer a discount on autopay if you are going to pay for car insurance in installments. This usually means that you can allow for an electronic funds transfer (EFT), on the due date. To automatically receive the money, you will connect the insurer to your bank account or provide credit card information.

You also get convenience, as well as a discount on autopay. This setup will make it easy for you to pay your auto insurance on time. Make sure that you have enough money to cover the EFT if it happens.

Complete payment

This payment option is not an option for everyone, but if you have enough money to pay your premium, it might be worth considering. For paying full, many insurers offer substantial discounts (i.e. you are avoiding the APR for car insurance).

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Most Frequently Asked Questions

Which is the best auto insurance company?

Your needs and income will determine the best auto insurance company. The factors that affect your quotes include age, car type and mileage, as well as credit scores and other factors. It is important to compare quotes to find the best price and most suitable premium.

Is it better for car insurance to be paid in full or by installments?

You will generally pay less for your policy if the full amount is paid. If you are unable to pay your car insurance premiums in full, or if you have to pay a large upfront payment, then making monthly car insurance payments may be a better choice. You should review your budget to determine what you can afford.