Save on Auto Insurance: Pay in Full!

I have noticed that many folks I know pay their auto insurance on a monthly basis. This seems as a convenient option, allowing for budgeting and spreading out your cost accross the year. They can also auto-deduct the amount from your account, so there are no bills to think about, checks to send or stamps to buy – as long as you have the available balance in your account, you’re good to go.

The question though is, does this make financial sense? While the terms may change from insurer to insurer, my auto policy is as follows: I can pay in full upfront, or get billed monthly for my premium plus a 16% APR interest charge. It’s this last piece that changes things – it’s a ridiculously high interest rate for anyone with a decent credit.  If you have the cash to pay for this upfront, do it. It’s unlikely that you can get a better after-tax return on you rmoney somewhere else.

If you don’t have the money to pay in full upfront, pay what you can as early as possible. You can consider getting a balance transfer, and pay much less in interest. For example, if your insurance premium is $1800, you can end up paying about $145 in interest.  A recent balance transfer offer I got was 0% APR for almost a year with a 4% balance transfer fee, resulting in an effective finance charge of $72. This is a quick way to save about $70 – by simply paying off your insurance bill with a balance transfer check, and then making the monthly payments to your credit card.

My advice is simple: pay off your highest interest debt first. Monthly insurance bills carrying a finance charge are no different than credit card bills, even though you’re technically paying as you go.