One considerable cost to owning a car in the US is car insurance—unless you reside in New Hampshire or Virginia where auto insurance is not mandatory. Even with these exceptions, you’ll be totally liable for at-fault accident costs, which, in most cases, is an even bigger cost. As of 2021, the annual average car insurance cost in the US was estimated at approximately $1,592.
Understandably, not every driver on American roads can raise over a thousand bucks in a single deposit for car insurance. To support these drivers, some insurance companies offer no-down-payment car insurance which allows drivers to pay their premiums in monthly installments instead of one large sum.
Before you get too excited though, it’s important to point out that technically there’s no such thing as a no-deposit car insurance policy—you have to pay at least the first month’s premium for the policy to take effect. No-down-payment car insurance is simply a marketing phrase used in the insurance industry to refer to a monthly car insurance payment plan as opposed to a single lump-sum deposit.
Only a handful of insurance providers in the U.S. offer no-deposit insurance because the insurance company takes a great deal of risk when covering a vehicle whose policy is not fully paid for, which typically translates to increased premiums in the long run. Moreover, owing to the nature of the risk involved, no-down-payment car insurance is only available to drivers with sparkling driving records and mostly those with low-value vehicles that don’t pose significant insurance risk.
In the US marketplace, the only way to find no-down-payment car insurance is by shopping around for available options. Only seven states permit the sale of no-deposit car insurance policies: Arizona, California, Florida, Georgia, New York, Washington, and Oklahoma. As mentioned above, insurers are likely to decline high-end vehicles for no-down-payment plans, as these are too expensive to insure.
When your budget is tightly stretched and you can’t afford to pay a lump sum deposit for your car insurance policy, you can consider shifting to a no-down-payment policy if you live in one of the states that allows them. Before purchasing a policy, make sure that you compare rates in order to get the best deal.
What Is a No-Down-Payment Car Insurance Policy?
If you buy a car in 2021, you should be prepared to fork out around $1,592 for your car insurance policy. If your budget has already been maxed out by your car purchase, this could mean not taking your new set of wheels for a ride unless you can raise the car insurance amount. Fortunately for you, the car insurance cost can be spread out over several months in form of installments, softening the initial blow. However, be forewarned, because while no-down-payment car insurance policies break up your payments over several months, they also tend to cost more in the long run compared to simply paying for everything up front. The overall cost is higher because insurance companies charge interest, which subsequently raises the total amount paid over the repayment period.
While you won’t be saving on insurance premiums, spreading out your premium payments will allow you to get on the road for as little as a few hundred bucks, as opposed to handing over the entire cost of the policy right away. You only have to pay the first month’s installment for coverage to kick in. The good news is that the first “deposit” is not a separate cost, but rather a portion of the overall cost.
Why Do Car Insurance Companies Require Down Payments?
A no-deposit car insurance is a financial arrangement you make with the insurance company where you agree to pay for your auto insurance policy in monthly premiums rather than making a lump sum deposit. The first installment, often about 20% of the total value of your car insurance policy, serves as the “deposit” that activates your coverage. Your insurance policy takes effect upon making the first installment.
Paying the down payment is considered by insurance providers as your commitment to the plan. Without that payment, the insurer can’t be sure whether you’ve agreed to the terms of the policy. The best part is that you’ll already be one month down in your payments—only another 11 to go. For insurance providers, the down payment acts as a form of security that helps lower their overall risk.
Keep in mind that your no-deposit car insurance policy only takes effect when you make the first installment. Also the larger the first deposit, the lower the deficit balance and subsequently, the smaller and more manageable the premium payments. According to the insurance experts at MoneyWizard.co, making a large down payment lowers the total cost of your car insurance in the long run, because your insurer will be charging interest on a smaller balance.
Is No-Deposit Car Insurance Right for You?
Whether or not you should get a no-deposit car insurance policy depends largely on the state of your personal finances, your driving record, the type of car you’re driving and your state of residence. Finding the ideal auto insurance policy and paying for it in one deposit will ensure that you get the best price on that policy. This is because, as mentioned above, you won’t be subject to other costs like interest. A lump sum payment is cheaper and comes with the peace of mind that you are covered throughout the year without worrying about changing rates or where you’ll find your next premium.
Therefore, if you can afford to pay for your policy up front, then getting costly no-deposit car insurance doesn’t make financial sense. However, for drivers who can only afford smaller monthly premiums, no-deposit car insurance is the best option. Even if they’ll be paying more in the long run, the alternative would be leaving their cars home until they can raise the full annual payment requested by insurance providers.
You can save on the cost of no-deposit car insurance by avoiding features you don’t necessarily need, such as comprehensive and collision coverage if you happen to be driving an older car. Because you’ll automatically be paying more if you opt for a no-deposit car insurance policy, you should take care to compare rates between insurance providers to ensure you don’t miss out on a cheaper policy elsewhere.
Pros and Cons of No-Down-Payment Car Insurance
Depending on how you look at it, there are both pros and cons to getting no-down-payment car insurance.
To begin with, paying for a year’s worth of car insurance in one lump sum means not having to worry about car insurance payments again for the next 12 months. This gives you peace of mind knowing that your car insurance coverage is in effect every time you drive throughout the year. That’s great, but what happens if you can’t scrape together one lump sum?
The only viable alternative in this situation is to break down your premiums into monthly chunks that you can afford. As such, no-down-payment car insurance puts you on the road with a smaller monthly budget that you can comfortably plan for.
Another benefit of paying monthly premiums is that the cost is predetermined, which means you won’t be taken by surprise by having to pay $132 one month and $230 the next. You can plan for your monthly payments each month and you won’t be disappointed. Drivers can sync their insurance payments with their income in order to avoid complications and make it easy to track their insurance remittances.
One obvious downside to no-down-payment car insurance is the increased overall cost of the insurance policy. You’ll be charged interest on the deficit, which means that the overall cost will be higher over the course of the 12 months, as opposed to making a one-time payment. Also, a missed payment may reflect negatively on your credit score.
What Are the Average Down Payment Costs?
Down payment costs for no-deposit car insurance vary from one insurance provider to another and by state. The size of your initial installment also determines the amount of interest that will accrue on your balance and the subsequent monthly payments.
In theUS marketplace, the average down payment costs are:
- For a monthly premium of $100, you’ll pay 0% down payment.
- For a $90 monthly premium, expect to pay about 10%, or a $60 down payment
- For an $80 monthly premium, expect to pay 20%, or a $120 down payment
- For a $70 monthly premium, expect to pay 30%, or a $180 down payment, etc.
However, there are several variables that come into play when determining average down payment costs, including your age and driving history, among others; therefore, whatever figures you come across will only be estimates—they won’t necessarily apply to your individual situation. It’s best to obtain quotes from insurers to determine exactly what you will be paying, and we can help. Using your zip code, the wizards at MoneyWizard.co can help you obtain quotes from different insurers.
Conclusion & Recommendations
While a no-deposit car insurance policy may suit your current financial situation, it is important to note that this is the most expensive alternative. However, when it is absolutely necessary for you to get no-down-payment car insurance, strive to make a large first payment to lower the amount of your monthly premiums and subsequently reduce the overall cost of the plan. Also, shop around for cheaper alternatives, get quotes, and analyze them so that you don’t pay more when a pocket-friendly option is available somewhere.