Paying in full vs monthly: installment fees and discounts

Paying your car insurance premium in full is almost always cheaper than paying monthly, because many insurers give a paid-in-full discount and charge a fee for each installment. On a typical six-month policy the difference can be a meaningful share of the premium. Monthly payments still make sense if paying in full would drain your emergency fund, and setting up automatic payments can recover part of the gap.

How insurers charge for monthly payments

Your premium is priced for the whole policy period, usually six or 12 months. When you split it up, the insurer takes on extra billing work and the risk that you stop paying before the term ends. Insurers recover that in one or more ways:

• Installment or service fees added to each monthly bill.
• A paid-in-full discount that you lose when you choose a payment plan.
• A larger down payment on the first bill, sometimes one or two months' premium.
• Late fees and reinstatement fees if a payment is missed.

How these are applied, and how large they are, varies by insurer and by state. Insurance departments review billing fees as part of rate filings in many states, and some states limit which discounts an insurer can offer.

What insurers publish

Some insurers spell out their payment discounts:

• Progressive lists a discount for paying the policy in full up front and, as an alternative, a discount for setting up automatic payments from a checking account or card. Its discount page notes that these discounts are not available in California, where Proposition 103 tightly regulates how auto rates and discounts are set.
• Arbella Insurance in Massachusetts lists a 6% paid-in-full discount.
• In New Jersey, the state's Special Automobile Insurance Policy costs $365 a year, or $360 if paid up front, according to the state's insurance department.

Many other insurers list "paid in full," "EFT" or "autopay" discounts without publishing amounts. Ask for the price both ways when you get a quote.

Worked example: what monthly payments cost

Say a six-month policy is quoted at $900 if paid monthly. The insurer offers an 8% paid-in-full discount and charges a $6 installment fee on each of five bills after the down payment. (All figures are hypothetical.)

Paying monthly costs $102 more per term in this example, about $204 a year. Expressed another way, you are paying roughly $102 to spread $828 over six months, which is a high effective interest rate for a short-term loan. The pay in full vs monthly calculator runs this comparison with your own numbers.

When automatic payments narrow the gap

If you cannot pay in full, an EFT or autopay plan often has lower or no installment fees and may come with its own discount. In the example above, removing the $30 in fees would bring the monthly total to $900, still $72 more than paying in full but much closer.

When paying monthly makes sense

• Paying in full would leave you without an emergency fund. A $1,000 deductible after a crash is harder to pay if your savings went to the premium.
• You expect to switch soon. If you plan to move, sell the car or change insurers within a few months, paying monthly limits how much money is waiting to be refunded (see below).
• Your insurer charges no installment fee and offers no paid-in-full discount. Then there is no penalty for spreading payments.

A middle option some people use: put the premium on a credit card you pay off in full, which gets the paid-in-full discount without draining cash for a month. Check whether the insurer charges a card fee.

What happens if you cancel after paying in full

Paying in full does not lock your money in. If you cancel mid-term, you are generally owed a refund of the unearned premium, but how it is calculated depends on the policy and state law:

• pro rata cancellation: you get back the unused portion exactly. Cancel halfway through a six-month term you paid $828 for, and you receive about $414.
• short-rate cancellation: the insurer keeps a penalty, so the refund is smaller than the pro rata amount. Some states restrict short-rate penalties, and many insurers refund pro rata when you cancel.

Ask which method applies before you pay in full if you think you might switch. See how to cancel car insurance the right way and how to switch car insurance without a gap.

The risk of missed monthly payments

A missed payment is the most common way drivers end up uninsured without meaning to. Most insurers send a notice and allow a short grace period before policy cancellation for nonpayment, with the exact notice period set by state law. If the policy cancels:

• You may be driving uninsured, with the penalties that brings.
• The cancellation for nonpayment can follow you to your next insurer and raise your price.
• Reinstatement, if offered, may carry a fee and may not cover the days the policy was lapsed.

Autopay prevents most of these problems. If you pay monthly, set a reminder a few days before each due date, and read what happens if your car insurance lapses for what to do if a policy lapses.

How to decide in three steps

1. Get both prices. Ask for the total cost paid in full, paid monthly with fees, and on autopay.
2. Work out the difference per year. Divide by what paying in full would take from your savings to see the effective cost of monthly payments.
3. Check your cushion. If paying in full still leaves you enough to cover your deductible and a month of expenses, paying in full is usually the better deal.

Key takeaways

• Paying in full is usually cheaper because of paid-in-full discounts and the installment fees you avoid.
• Autopay or EFT plans can recover much of the gap if you cannot pay up front.
• Discount rules vary by state; Progressive, for example, says its pay-in-full and automatic payment discounts are not available in California.
• Paying in full does not trap your money: unearned premium is refunded if you cancel, pro rata or with a short-rate penalty depending on the policy and state.
• Missed monthly payments can lead to cancellation and a lapse, so automate payments if you go monthly.