Auto Insurance – Fixed Rate Vs Annual Escalation

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It has been established that 65% of South African road users are not insured. There are many reasons why someone would choose not to insure their vehicle. Perhaps they do not even have a choice in the matter, in the respect that they can not afford any extra monthly expense. Auto insurance can be very costly, and there is also the fact that this monthly fee can fluctuate due to a number of aspects.

The undeniable fact is that car insurance is a necessity on our South African roads, especially when taking into consideration the high accident and motor vehicle theft rate in our country.

When making the decision to acquire auto insurance there are two options for you to consider. You may either choose a fixed rate or an annual escalating rate. An annual escalating rate is liable to fluctuate in accordance to the interest rate situation as well as having a standardized annual increase. There are aspects to this choice that must be taken into consideration: One would need to assess whether this would be a more viable and more importantly, a more affordable option to the fixed rate fee. The fixed rate is a set amount that one will pay on their car insurance each and every month. This rate is not affected by any factors like the annual escalation rate, but as a result it is more expensive.

An annual escalation has a normal percentage rate by which your car insurance premium will increase each year. An annual escalation is also prone to the oscillation of the interest rate. If the interest rate goes down, this is a good thing for the auto insurance holder. They will pay less interest on their fixed premium, and therefore save money. The problem lies when the interest rate goes up. Especially in South Africa's current economic situation, this can be expensive. If your premium is prone to rise of the interest rate, you could be paying a lot more than you expected.

This is why someone may consider the fixed / flat rate option. Overall it is a more costly monthly amount that you will pay in comparison to the annual escalation rate. It can easily seem like a rather expensive option when compared to the annual escalation fee. One would have to assess, given our current economic situation, whether this would be a wiser choice or not. The higher the interest rate climbs the more one will have to pay on the annual escalation rate. Sometimes, especially now with the national interest rate being so high, this amount can far surpass the seemingly expensive fixed rate option.

There is a safety in choosing the fixed rate option. Many people are very nervous when hearing updates on the state of the interest rate. Having to pay an increase on their car insurance premium can hurt their pockets quite substantially, especially with the rising cost of food and basic living. With the fixed rate option they will not have to worry about paying an exorbitant amount on their car insurance premium at the end of the month, because the fee that they will pay will not change. It may be a bit more expensive than the annual escalation fee in times of low interest rates, but it is an amount that they have agreed on and have come to expect to pay at the end of each month.

In retrospect, perhaps one who has chosen the fixed rate option will have to learn to look the other way in times of low interest rates. People do not want to think that they could be saving money each month had they taken the alternative option. Then again, with today's growing economic turmoil, choosing that alternative option is almost the same as gambling with something you have absolutely no control over.



Source by Andries Malan