A number of years ago, I had a nasty experience with an annual car insurance package I'd taken out. I'd had this package as a rolling contract for about three years and thought I'd had no problems at all. When I first took out this annually-paid package, I thought it was a good deal: it was costing me about £350 for the first year as a lump sum, which was significantly cheaper than the national average.
This was a policy that automatically renewed year on year, and whenever the renewal letter arrived I barely read it. On one occasion (and I'm sure I'm not the only person to do so) I didn't even open the renewal letter: I simply noted that it had arrived and shredded it. It was because of this that I didn't realise that the policy was rising in price every year until it was over £500 (much higher than the national average). One day, I opened my online banking to see about £530 had left my account all in one go, which meant I really had to skimp on that week's grocery shop. I know: always check the terms and conditions. As a result, I decided to cancel this new policy and to find a new one. As it happened, I decided to make a total fresh start, cashed in my old vehicle and got myself a little silver Audi A3 to use for my commute to work. The insurance policy I took out for this vehicle was one that allowed monthly payments. Did I read the T&Cs this time around? You bet I did.
The new policy I had got cost me £39 per month. This is lower than the national average, so I felt pleased with myself. What I liked most about this package was that there were no hidden surprises: this £39 was a flat rate that would not rise month by month. I could budget more accurately. However, I do feel that monthly budgeting has a psychological element to it: even though paying for our car insurance by means of an annual lump sum may be cheaper in the long run than paying in monthly instalments, we often prefer to pay the monthly instalments because it seems like a smaller amount at the time. £39 is something I can definitely manage to spend every month, and as it only costs me about £7 extra to add an additional driver to the insurance for a fortnight or so, I can also lend the car to my daughter when she is visiting. All in all, I was much happier with my decision to take out that monthly policy than I was with my decision to take out the annual policy before it. Nevertheless, I am aware of the psychological effects at play in all of this. It is just too easy to keep on making these regular payments, when perhaps I should be shopping around more.