Worked quotes and renewal checklists
Paying car insurance monthly or annually: how much extra does monthly cost?
Work out what paying Australian car insurance by monthly instalments costs compared with paying annually, the implied interest rate and the risk of missed payments.
Many Australian insurers charge more in total when you pay car insurance monthly than when you pay the annual premium upfront, though some charge the same or only a small difference. To compare, multiply the monthly instalment by the number of instalments and subtract the annual price: that is the cost of spreading the payments. Expressed as an interest rate, even a modest-looking loading can be the equivalent of a high rate of interest, so if you can pay annually without straining your budget, it is usually cheaper. If you cannot, monthly payments are a reasonable way to keep cover in place, provided you never miss one.
This guide sits in the renewal checklist section.
Step 1: compare the totals
Look at your renewal notice or quote for:
- the annual premium if paid in one amount
- the monthly instalment and the number of instalments (usually 12)
- any first payment that differs from the others
Worked example (illustrative)
| Payment method | Amount | Total over 12 months |
|---|---|---|
| Annual | $1,200 once | $1,200 |
| Monthly | $108 x 12 | $1,296 |
Extra cost of paying monthly: $1,296 - $1,200 = $96, or 8% of the annual premium.
Step 2: what that means as an interest rate
The first instalment is paid on the day cover starts, so you are really "borrowing" the rest of the premium and repaying it over the following 11 months. In this example:
- Amount effectively borrowed after the first payment: $1,200 - $108 = $1,092
- Repaid: 11 x $108 = $1,188
Solving for the rate that makes 11 monthly payments of $108 repay $1,092 gives about 1.43% a month, or roughly 17% a year (about 18.6% when compounded). That is far more than the 8% headline difference suggests, because on average you are only "borrowing" about half the premium for half the year.
Not every insurer charges extra for monthly payment, so check the actual figures for each quote. Where the totals are equal, monthly payment costs nothing extra.
Step 3: weigh the alternatives
| Option | Cost | Considerations |
|---|---|---|
| Pay annually from savings | Annual premium only | Best value if the money is available and not needed as an emergency buffer |
| Pay monthly | Annual premium plus loading | Keeps cash flow smooth; missed instalments can lead to cancellation |
| Pay annually on a credit card | Annual premium plus any card interest | Cheaper only if you repay the card before interest applies |
| Save monthly in advance, then pay annually | Annual premium only | Takes a year to set up, then saves the loading every year |
Saving ahead (illustrative)
If you put $100 a month into a savings account for 12 months before renewal, you will have $1,200 plus a little interest to pay the next premium annually and save the $96 loading. After that, keep putting aside the monthly amount.
The risk of missed instalments
When you pay monthly, a failed payment does not stop cover immediately, but an insurer can cancel the policy for non-payment after an instalment has been overdue for a period, subject to giving you written notice under the Insurance Contracts Act. If the policy is cancelled you are uninsured, and a later insurer may ask whether you have had a policy cancelled. To avoid this:
- set the payment date just after your pay day
- keep a small buffer in the account
- update card details before a card expires
- contact the insurer straight away if you are in financial difficulty; insurers that subscribe to the General Insurance Code of Practice have financial hardship processes
Comparing quotes with different payment methods
When comparing a renewal with new quotes, compare like with like:
- If you will pay annually, compare annual totals.
- If you will pay monthly, compare 12-month totals for monthly payment.
A quote can be cheaper annually but dearer monthly if its loading is higher. Add this check to the steps in the renewal vs new quotes example, and use the premium reduction calculator to see the effect of discounts on the annual figure. A higher excess can also offset a monthly loading; see choosing your excess.
Checking a monthly quote properly
Monthly prices on comparison sites and insurer websites are easy to misread. Before you compare:
- Confirm the number of instalments. Most are 12, but a quote can show a first payment that differs from the rest.
- Check what the instalment includes. It should include GST and stamp duty; if the annual price includes them and the monthly price is shown before tax, the comparison is wrong. See GST and stamp duty on car insurance.
- Look for fees. Some insurers add a fee for each instalment, for a failed payment or for changing the payment method.
- Multiply it out. Instalment x number of instalments + any first-payment difference + fees = 12-month total.
Illustrative: an instalment of $97.50 with a different first payment of $110 over 12 payments totals $110 + 11 x $97.50 = $1,182.50. If the annual price is $1,120, monthly costs $62.50 more, about 5.6%.
When paying monthly makes sense
- Your savings are your emergency buffer and paying $1,000 or more at once would leave you exposed.
- You expect to sell the car or change cover during the year, and cancellation refunds on annual policies would be reduced by fees. Check both options.
- The insurer charges little or nothing extra for monthly payment.
Frequently asked questions
Is the monthly loading a form of credit?
Many insurers present monthly payment as an instalment option of the insurance policy rather than as a separate loan. The cost still behaves like interest, which is why comparing totals matters.
Can I switch from monthly to annual payments mid-year?
Often yes. Ask the insurer how the remaining amount would be calculated.
What happens to my monthly payments if I cancel?
Generally you stop paying and may receive a refund for any period paid in advance, less any cancellation fee. Check the PDS.
Does paying annually give a discount, or monthly add a loading?
It is two ways of describing the same difference. Compare the two totals.
Sources
- Moneysmart — budgeting for insurance and comparing costs
- ASIC — insurance disclosure and conduct
- Insurance Council of Australia — General Insurance Code of Practice and financial hardship
- Australian Financial Complaints Authority — complaints about cancellation
