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What is premium financing?
When you go to take out insurance, you’re probably more familiar with paying for it in monthly instalments than all at once.
But, just because you’ve only paid for one month’s insurance, it doesn’t mean you only get one month’s worth of cover if you need to claim. This is because you are actually borrowing the full amount for your insurance policy and repaying it monthly – this is called premium financing.
Many insurers offer the option of paying for your entire insurance policy – usually a year’s worth at a time – up front. However, many of us don’t have the cash to pay for it all at once, which is why it’s common to pay for the protection in monthly instalments.
Like with most borrowing, though, you have to pay interest on the money you’ve borrowed. This is why it’s usually cheaper to pay for your insurance premium up front. If you can afford to, you could save quite a bit of cash by paying for the entire policy when you take it out.
Either your insurer will “lend” you the full amount for the insurance, or they will speak to a third party who will pay for the policy in full and you’ll repay them in instalments.
Making budgeting easier
One of the main advantages of paying monthly is that it’s easier to budget. Paying for an entire insurance premium at once can be a big cost, so having it in more affordable, monthly chunks makes things easier to manage.
Although this option does cost more in interest, a large, one-off cost is simply unaffordable for many of us. It’s also difficult to predict whether you’ll be able to pay for another year’s worth of cover further down the line, so paying monthly is a convenient way to ensure you, your home or your belongings are covered.
It might not be an option for all of us
Even though the cost of many insurance policies are advertised at the monthly price, you might not be able to pay monthly if you have a poor credit history.
As you are borrowing the money for the full insurance policy, an insurer may turn you away if you have struggled with credit in the past. This is because they want to be sure you won’t fall behind or have difficulty making the monthly payments. In this case, you may have no choice but to pay up front.
If you do have a poor credit history, it’s important to take steps to start repairing the damage if you haven’t already. Head here to find out how to improve your credit history in three months.