What Is No-Down-Payment Auto Insurance?

No-Down-Payment Car Insurance Explained

A young man smiles as he drives his car and his girlfriend sits in the passenger seat

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No-down-payment car insurance is a somewhat misleading term used by some carriers to describe an auto insurance policy that you can buy without paying up front. As enticing as this offer might sound—especially if you’re on a tight budget—before you choose a “no-down-payment” insurance policy, make sure you fully understand what it means.

Definition and Examples of No-Down-Payment Car Insurance

When you initially purchase your auto insurance coverage, you have to choose between paying the amount in full or paying in monthly installments. Installment plans are common among the major insurers; for example, Geico allows you to choose to pay in full or break your payment into two to six monthly installments.

If you choose to pay in installments, you’ll make your first payment on or before the policy’s effective date. Although some carriers market this option as “no down payment” insurance, that name isn’t quite accurate. Your payment might not be called a down payment, but you’re still paying something at the start of your policy. 

How Does No-Down-Payment Car Insurance Work?

If you choose to pay your full premium as a lump sum at the start of your policy, most insurance companies will reward you with a discount. 

But if you’ve chosen a policy that’s labeled “no-down-payment” insurance, you should look closely. It is simply a “marketing term,” John Espenschied, owner of Insurance Brokers Group in Chesterfield, Missouri, explained in an email to The Balance. “Instead of making the full annual premium payment in full, the carrier is more than likely allowing a one-month premium payment toward the policy period.”

If you choose to pay your premium in installments, you’ll need to make your first payment on or before the policy’s effective date. This isn’t a separate down payment—it’s simply the first installment in your overall premium payment plan. You’ll be required to pay some money before your coverage starts, whether an insurer refers to it as your first payment, a deposit, a down payment, or something else. In some states, like New York, it’s mandatory for insurers to collect a minimum percentage of the premium when coverage begins.

Why Do Auto Insurers Require Upfront Payment?

There are many reasons why insurers require upfront payment in full or at least the first month’s payment. First and foremost, insurance companies offer coverage based on the amount of risk they are willing to take on. Requiring at least a partial payment up front lessens the financial risk to the carrier. 

Another reason is to cover an insurance carrier’s administrative costs, plus the additional costs if you use an insurance broker or independent agent. “If a policy were issued with no money down and then cancel[ed], we would have done a lot of work without earning any income,” said Espenschied.  

“Carriers generally don't want to take on the risk of insuring a driver who hasn't yet begun paying their premiums,” said Myles Trempe, producer with Wallace and Turner Insurance in Springfield, Ohio, in an email to The Balance. “Carriers may view a client who can’t pay a down payment as someone who is only acquiring auto insurance to drive a vehicle off the lot or get their vehicle registered.” 

Pros and Cons of a Lower Down Payment

The obvious pro to a car insurance policy with a smaller upfront cost is that it frees up cash for other expenses, such as car repairs or other bills. This type of payment plan could be appealing if you’re struggling to make ends meet.

But paying the bare minimum to start your coverage has definite drawbacks, too. The main one is that you’ll usually wind up paying more over the life of your policy because most insurers either charge fees for installments or offer discounts for paying in full. However, if you don’t have enough cash to pay in full at the start of the policy, it makes sense to choose an installment plan that allows you to fit premium payments into your monthly budget.

How Can You Lower Your Upfront Payment? 

It’s possible to lower your upfront payment with a little bit of planning. One option is to spread your premium over more installments, which lowers the amount you’ll pay each time. For example, as mentioned above, GEICO allows you to pay in two to six installments. If you’re buying a new policy and choose the five-installment plan, you’ll pay 25% up front, which is lower than the percentage you’d pay with GEICO’s other installment plan options.

Many insurers will charge a fee for each installment payment, so make sure to factor that into your calculations when choosing an installment plan.

Another option is to lower your overall premium by asking about additional discounts (like autopay and good student discounts), raising your deductibles, or only buying the minimum car insurance coverage required in your state. If you live in a state where insurers can consider your credit score while calculating your premium, you may also want to focus on improving your credit score

Where Can You Find Cheaper Car Insurance?

The average cost of auto insurance was $1,190 in 2018, according to the most recent data available from the National Association of Insurance Commissioners. In addition to the strategies mentioned above, the best way to find cheap car insurance is to shop around and thoroughly compare quotes from several carriers. Rates can vary widely depending on the carrier and the coverage options you choose.

Rates and discounts are important, but so is choosing a carrier with strong financial standing and high customer satisfaction ratings. Review a carrier’s financial strength with AM Best, and research its customer ratings from organizations such as JD Power. The Balance also publishes in-depth car insurance company reviews to help you find the best provider for your needs.

Key Takeaways

  • No-down-payment insurance is generally a marketing term for a policy you can pay in installments. You’ll pay the first installment on or before the policy’s effective date. 
  • The convenience of a lower upfront payment may cost you more over time, due to installment fees or the loss of a discount you might receive for paying in full. 
  • To save money on car insurance, shop around and compare quotes from multiple insurers and ask about all available discounts. You could also consider raising your deductible or choosing only the coverages that are mandatory in your state.