A “service charge” has been added to your monthly auto insurance bill, and you’re wondering what it is. We’ve got you covered.

Some insurance companies charge each monthly payment fee if you do not pay in full for the policy.

An installment payment service fee usually covers the cost of processing your payment on a monthly basis. To avoid paying this monthly service fee, you can pay in full when you buy your auto insurance policy.

Here’s what you need to know about an installment fee charge.

Why do insurance companies charge installment fees?

Insurance agencies use premium installment charges to cover the administrative costs associated with more frequent payment processing. More insurers offer one-year, six-month or one-month payments on car insurance policies.

It is to the insurer's best advantage if you pay for your entire annual premium at one time. This means less payment processing but also more cash flow for them. Essentially, by paying in advance, you’re loaning money to the insurer for up to a year at a time.

If you choose a monthly payment option, the insurer does not get the full amount up-front and has to devote more time and effort to the more frequent payment processing.

How much are you paying in installment fees?

The answer to this question depends on how you are paying monthly payments.

If you call or get on your account every month to set up payment, you will pay an installment fee charge of around three to five dollars.

Like Geico, many insurers charge a much lower installment fee (one dollar instead of five dollars) if your payments are set to withdrawal directly from your bank account, also called electronic funds transfer (EFT).

The bottom line on the installment fee charge

Should you pay-in-advance annually or choose a monthly payment option? Which is best for you depends on your financial situation.

Paying in installments each month helps some people budget more effectively. For others who are comfortable with the annual payment in full, they reap the benefit of saving or repurposing the money they save on installment fees.

Check with your insurance agent to determine their insurance installment fee if you choose to make installment payments monthly. Don’t forget to ask about automatic payment discounts as well as other discounts you may qualify for. Use this information to decide what payment plan is best for you.

If you are struggling to afford your insurance, check out our expert tips on how to get the cheapest car insurance without sacrificing coverage.