Owning a car doesn’t come cheap – the average car insurance annual premium was $1,323 last year. For students and graduates just starting their careers, that’s a big chunk of change. Keeping up with car insurance costs can make it difficult to pay off debt such as student loans and can prevent individuals from driving cars at all.
But there’s a new option for drivers who want to cut their insurance costs. Pay-as-you-go car insurance is based on your driving habits and can dramatically reduce your costs. Below, find out if pay-per-mile car insurance is for you.
What is pay-as-you-go car insurance?
Pay-as-you-go car insurance companies offer solutions for car owners who drive less than most people. MetroMile, one pay-per-mile insurance startup, estimates that 65 percent of drivers overpay to subsidize high-mileage drivers with traditional insurance companies. Premiums based on your actual usage change that model.
Sometimes also called telematics insurance, pay-as-you-go car insurance uses a small tracking device that the company installs in your vehicle. The device tracks exactly how many miles you drive each day. The fewer miles you drive, the lower your premiums will be.
Companies like MetroMile are using this approach because the fewer miles you drive, the less likely you are to be in an accident and make a claim.
Advantages of usage-based insurance
Pay-as-you-go car insurance gives the individual more control. Traditional companies base your premiums on factors such as your age, marital status, and education. Per-mile coverage bases it on the personal user’s driving habits, so you have more control over the cost.
With pay-as-you-go car insurance, you can view the telematics data yourself and monitor how many miles you’re racking up. If your mileage is up one month and money is tight, you can rein in your driving and use other options, such as public transit or carpooling, to reduce your cost.
The potential savings are substantial. MetroMile says drivers who switch save an average of $500 a year. But if you have a small commute and drive about 2,500 miles annually, your savings can be as high as $650 a year.
Drawbacks to telematics coverage
If you switch to pay-per-mile car insurance, there can be some fees involved. Some insurers charge you to install the tracking device, which you would not have with a traditional company.
Pay-as-you-go premiums can vary from month to month. Many companies charge you a base rate each month, plus an additional per-mile rate depending on your driving habits. Because it can fluctuate, you need to allow for changes in your monthly budget.
Usage-based coverage is not for everyone. The average driver logs over 13,000 miles on the road a year. If you meet or exceed that average, pay-as-you-go car insurance will likely not result in savings for you. In fact, you could end up paying more.
Deciding if pay-as-you-go coverage is for you
Drivers who fall into the high-risk insurance category, such as young drivers or inexperienced drivers, can often save by switching to pay-per-mile car insurance policies. Regardless of your age or driver status, if you don’t drive very much, switching to usage-based coverage can save you a lot of money.
To figure out if switching to a telematics policy makes sense, calculate how many miles you drive in a typical year. Track your mileage for a month, then multiply the number by 12. For example, if you drive 600 miles a month, you’ll likely log about 7,200 miles a year.
Most pay-as-you-go car insurance companies charge between three and four cents a mile. If you multiply your annual 7,200 mileage by the higher per-mile cost – four cents – you can expect a mileage charge of just $288 for the year.
But that’s on top of your base rate. MetroMile, for example, charges $30 a month (that’s $360 a year) as a fixed rate. To find your total insurance cost, add your annual base rate to your mileage charge. In the example above, that totals $648 – approximately half the national average premium cost for traditional coverage.
Other ways to get affordable car insurance
If you log a lot of driving miles or usage-based insurance is not yet available in your area, there are still ways to reduce your insurance premiums:
- Shop around: Experts recommend shopping for insurance every six months. A lot of factors can change, such as your credit score, so comparison shopping can help you get the best rate.
- Raise your deductible: If your monthly premium is too expensive, consider raising your deductible. You’ll pay more out of pocket if you need repairs, but increasing your deductible can cut your monthly expenses.
- Check for discounts: Check with your insurance company to ensure any discounts you may be eligible for are applied. Some offer good-student discounts or employer discounts which can reduce your rate.
Managing your costs
If you need your car for daily life or work responsibilities, car insurance is a necessary expense. While it can get pricey, options like pay-as-you-go car insurance can help you reduce your monthly bill.
For more information about car insurance, check out 9 essential tips to find the most affordable coverage.
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