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I've recently purchased a vehicle and was planning on prepaying my auto insurance for the year up front rather than divided into monthly payments.

Should I rather put some of that money to paying down more of the principal of the car loan , and pay auto insurance monthly increments as there is no interest associated with this? I have an open-ended loan and I can pay lump sum payments towards principal at any time.

I'm also slightly worried about potential cash flow issues due to economic disruption of Covid-19.

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    So did you compare the monthly vs yearly price? Usually there is a rebate for paying yearly? – Daniel Mar 13 at 20:20
  • Unfortunately in Canada they gouge us on auto insurance and there is also no benefit to paying yearly although there should be. My insurance for the year is about $3,480 USD with a COMPLETELY CLEAN history NO tickets, cancellations, excellent credit rating, etc. – OntarioCanadaF30 Mar 13 at 20:36
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    Obviously, if there is not benefit in paying early, pay as late you can. No upside in giving up your liquidity for another party's gain. (unless you can´t handle money) – Daniel Mar 13 at 20:40
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If there are no financial advantages to pre-paying your insurance, then your hypothesis is correct - it's probably in your best interest to pay the loan down with your cash now, and pay the insurance monthly.

But be sure to check on your insurance policy about payment terms - every policy I've ever had (granted, I'm in the US) has had a significant discount for pre-paying (the best has been on my current motorcycle policy, where I can save just more than 10% by prepaying). If your policy has such a discount, it may make sense to pre-pay the insurance instead.

If you do choose to make a lump sum payment on the car loan, it probably makes sense to actively communicate with your bank to make sure the payment is applied immediately to principal. Some banks may interpret lump sums as your intention to pre-pay the "normal" monthly payments, which essentially means some of the lump sum gets used towards interest, which is not in your favor.

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