If you’re buying car insurance for the first time, you may be curious how insurance companies determine your premium — which is the amount you pay in order to have insurance coverage for your vehicle.

The cost of your car insurance premium may vary since it’s based on a number of different factors, including your driving record, how much you drive, the types of insurance coverage you choose and even your age.

Let’s take a look at how a car insurance premium works, the average insurance costs and the factors that can affect your insurance rates.

• How does a car insurance premium work?
• How much does it cost to insure a car?
• What factors determine your insurance premium?

How does a car insurance premium work?

Your premium is the amount of money you pay to an insurance company to provide insurance on your vehicle.

Your car insurance premium may be paid monthly, every six months, or even just once a year, depending on the payment options your car insurance company offers.

In exchange for your auto insurance premium, your insurance provider will provide you with the coverage outlined in your insurance policy.

Your car insurance premium costs are based partly on the types of insurance coverage you choose, but other factors can affect your total cost (more on that later).

In every state except New Hampshire, you’re required to have a minimum amount of coverage. This can help protect your wallet by covering costs — up to the coverage limit outlined in the policy you choose — for example, to cover injuries or property damage you cause another driver in an accident.

Keep in mind that your car insurance premium is different from your deductible. The insurance deductible is the amount you pay out of pocket on an approved claim before your insurance kicks in.

How much does it cost to insure a car?

The average liability insurance premium nationwide was about $644 in 2018, according to the 2021 Auto Insurance Database Report from the National Association of Insurance Commissioners, or NAIC. Averages varied from state to state, with a low of just under $308 in North Dakota and a high of more than $1,015 in Louisiana.

And the average premium nationwide for a combination of liability, collision and comprehensive coverage was around $1,189.

The cost of your car insurance premium can depend on a number of different factors — some of which you can control (for example, where you live or the kind of car you drive) and some that are out of your control (such as your age).

What factors determine your insurance premium?

Here are some of the factors that could affect your car insurance rates.

• The types of auto insurance coverage you get — Are you buying only liability coverage, comprehensive or collision coverage, or even full coverage? More coverage will likely mean higher premiums. And choosing high coverage limits and/or low deductibles will likely drive up your cost of car insurance, too.
• Your driving history — Are you an experienced driver without any blemishes on your record? Or do you have a few tickets and an accident or two in your driving history? Even the amount of time you’ve been driving can affect your insurance premium.
• Where you live — Urban neighborhoods often have higher rates of accidents, vandalism and theft than rural areas, so your car insurance may be higher if you live in a big city.
• Your age — Younger drivers often pay more for insurance coverage because they have less experience on the road and are at higher risk of being involved in an accident.
• The type of car you drive — When determining your premium, insurance companies consider a few factors related to your car, such as the cost to repair it and overall safety record. But if your car has safety equipment, you might qualify for a car insurance discount, depending on your insurer.
• Your credit history and insurance score — Insurance companies use your credit-based insurance score to predict the likelihood of you being in an accident and filing a claim. But note that California, Massachusetts and Hawaii have all banned the use of credit-based insurance scores in determining insurance premiums.
• Your mileage and driving behaviors — Do you have a long daily commute, or do you only drive to run errands on weekends? The more you drive, the higher your premium could be.

What’s next?

With so many factors affecting your car insurance premium, be sure to shop around for car insurance. Gather and compare insurance quotes from multiple auto insurance companies to help you find the best coverage and rates for your needs.

And be sure to ask about any potential insurance discounts or other ways you may be able to bring down the cost of your car insurance premium.

If you or your passengers are injured in a car accident, medical payments coverage can help you pay for the medical expenses — no matter who’s at fault.

Medical payments coverage — which is sometimes called med pay — also often helps cover medical and funeral expenses if you or a family member is injured while walking or riding in another vehicle.

While this type of coverage may provide similar benefits to your health insurance, it can help fill any coverage gaps and cover your health plan deductibles and copays.

Let’s take a look at how medical payments coverage works, where it’s required and how it differs from other types of auto insurance coverage.

• How does medical payments coverage on auto insurance work?
• Is medical payments coverage required?
• What’s the difference between PIP and medical payments coverage?

How does medical payments coverage on auto insurance work?

Medical payments coverage can help cover medical expenses if you or your passengers are injured in an accident — no matter who caused the accident.

Medical payments coverage can help cover a range of expenses, depending on your policy. Here are some of them.

• Health insurance deductibles and copays
• Doctor and hospital visits
• Surgeries
• X-rays
• Chiropractic treatment
• Ambulance fees
• Prosthesis
• Dental care
• Nursing services
• Funeral expenses

Say you’re in a car accident where you hit another driver, and you and your passengers are injured. Everyone receives medical treatment, and the total cost is around $20,000.

Who pays for these medical expenses?

Your health insurance may cover some of your costs. Medical payments coverage can fill some gaps by helping to cover your passengers’ expenses and any of your medical expenses that health insurance may not cover — up to the coverage limit. You choose the coverage limit when you buy medical payments coverage. Expenses beyond that limit would need to be paid out of pocket.

But if you don’t have medical payments coverage, you’d be responsible for paying your medical expenses that health insurance doesn’t cover out of your own pocket.

Medical payments coverage versus bodily injury liability insurance

While both medical payments coverage and bodily injury liability insurance help pay for medical expenses, they each cover different parties.

Medical payments coverage helps cover your and your passengers’ medical expenses, while bodily injury liability insurance helps pay for the other driver’s medical expenses — but only if you cause the accident.

Is medical payments coverage required?

Medical payments coverage is typically optional in fault states — but it’s required in New Hampshire and Maine, which are both fault states, and in Pennsylvania — a fault/no-fault hybrid state.

In a state with no-fault insurance laws, each driver’s insurer pays that driver’s medical expenses — up to a certain limit — after an accident. This is different from a fault state, where the at-fault driver’s insurance company pays for medical expenses incurred by both drivers and any passengers, up to a limit.

In no-fault states, drivers may be required to buy personal injury protection, or PIP, which is similar to medical payments coverage.

What’s the difference between PIP and medical payments coverage?

PIP is similar to medical payments coverage — it can help pay for your or your passengers’ medical bills or funeral expenses after an accident, no matter who’s at fault.

But depending on your state, PIP may also help cover some expenses that medical payments coverage doesn’t cover, like lost wages and childcare expenses if you can’t work or care for your kids due to injuries from an auto accident.

And there’s another key difference between PIP and medical payments coverage: PIP may be required or optional in no-fault states, while medical payments coverage is typically available in at-fault states.

What’s next?

If you live in Pennsylvania, New Hampshire or Maine, you need to get medical payments coverage. But if you live in a state where coverage is optional, it could be a worthwhile addition to your auto insurance policy. It could be especially helpful if you have a high health insurance policy deductible or low health coverage limits, and you’d have trouble paying for medical expenses out of pocket. An insurance agent can help you determine whether this coverage makes sense for you.

When shopping for car insurance, be sure to gather and compare several quotes to find the auto policy that best fits your needs.

Confused about how a car insurance deductible works?

When shopping for car insurance, you’ll likely come across the word “deductible” and might wonder how it affects you and your insurance costs — and when you’ll actually need to use it.

A car insurance deductible is the amount of money you’re responsible for paying after you file an approved insurance claim. Your insurance company covers the rest, up to your coverage limit.

Let’s take a look at how a car insurance deductible works, when you need to pay it (and when you don’t), and factors to consider when deciding whether to choose a lower or higher deductible.

• How does a car insurance deductible work?
• Do I have to pay the deductible if I’m not at fault?
• Should I choose a high or low deductible?

How does a car insurance deductible work?

A deductible is the amount you’ll pay out of pocket for car repairs or replacement before your auto insurance company pays the balance, up to your policy coverage limit. Both comprehensive coverage and collision coverage have deductibles, while some other types of coverage — such as liability insurance — typically just have coverage limits. Common auto insurance deductible amounts are $250, $500 and $1,000.

Let’s say you skidded into a guardrail, filed an insurance claim that was approved and took your car to the body shop for repairs. Repairs totaled $5,000, and you have a $500 deductible. The insurance company would give the body shop $4,500, and you’d have to pay the other $500 to the shop when the repairs were completed. Or you might pay for the cost of repairs upfront, and your insurance company would reimburse you, minus your deductible.

But what if your car is totaled? If that happens and your claim is approved, your insurance company will reimburse you for the actual cash value of your car — up to your coverage limit — minus your deductible. For example, if your insurance company values your car at $8,000 and you have a $500 deductible, your insurer would pay you $7,500.

Keep in mind that you’ll have to pay your deductible for each claim you file. A car insurance deductible isn’t a single amount that you pay each year before services are covered, like you’ll typically find with health insurance deductibles.

Do I have to pay the deductible if I’m not at fault?

In short, it depends on where you live.

In most states, if you’re in an accident that’s the other driver’s fault, their liability insurance is usually responsible for covering your repairs, up to the coverage limit.

But if you live in a no-fault state, it doesn’t matter who caused the accident. If your car is damaged and you have collision insurance, you’d need to file a claim with your insurance company and pay your deductible before your coverage kicked in.

You’ll likely also need to pay a deductible in these scenarios.

• You’re in a single-car accident, such as sliding on wet pavement into a tree. Your collision insurance would likely help pay for repairs, up to your coverage limit, after you pay your deductible.
• Your car is stolen or damaged by vandalism, a natural disaster, a falling object or an animal. Your comprehensive insurance will typically help pay for the cost of repairs up to your coverage limit, minus your deductible.
• Your windshield cracks or shatters. Comprehensive coverage generally covers glass breakage, up to your coverage limit, minus your deductible.

Should I choose a high or low deductible?

The best auto insurance deductible for you depends on your finances and needs. Remember that a high deductible usually means a lower car insurance premium and vice versa. But a higher deductible isn’t always the right answer.

When choosing your insurance deductible amount, ask yourself two questions.

1. How much could I cover out of pocket if my car needed some repairs or even replacement? Could you realistically shell out $1,000 if your car were damaged? If you don’t have money set aside in an emergency fund, a lower deductible might make more sense for you.
2. How much can I afford to pay each month for car insurance? A range of factors affect car insurance rates. You might find that you can only afford the premium if you choose a higher deductible. If this is the case, be sure to set aside some money in case you need to file a claim and pay your deductible.

What’s next?

Beyond your deductible, factors like your age, where you live, the age and value of your vehicle, and your driving record can all cause your insurance rates to go up or down.

Be sure to shop around and gather car insurance quotes from several companies. As you compare them, make sure that the deductibles and liability limits are the same across quotes so that you’re doing a fair, apples-to-apples comparison.

Cash-out refinancing means that you refinance for more than what you currently owe on your car. The amount you can borrow is based, in part, on the equity you have in the vehicle. If you’re approved for a cash-out refinance, it can allow you to get new loan terms and some money in your pocket for other expenses or an emergency.

Let’s take a look at how cash-out refinancing of an auto loan works compared to traditional refinancing, as well as some things to consider before you decide to go this route.

• What happens when you refinance a car loan?
• What is a cash-out refinance auto loan?
• Is a cash-out refinance loan worth it?

What happens when you refinance a car loan?

With a traditional refinance, you take out a new loan to pay off your current loan.

If your credit scores have improved or interest rates have dropped in the time since you got your original loan, you might be able to get a lower interest rate on a new loan, which could help you save money. You may also be able to save on your monthly payment if you extend your loan term. Just keep in mind that you’ll likely end up paying more in interest if you choose a longer loan term.

What is a cash-out refinance auto loan?

Cash-out refinancing involves applying for a new car loan to cover the remaining balance on your original loan, plus an extra amount. How much you can apply for depends on the lender and how much equity you have in the car. And if you’re approved, the funds may be released in a lump sum, though it can vary by lender.

Let’s say you’re approved for a cash-out refinance loan for $13,000 to cover your original auto loan of $10,000, plus borrow another $3,000 from the equity you have in the car. You’ll get $3,000 cash in hand and be responsible for paying down the $13,000 cash-out refinance loan with monthly payments and interest.

You could use this extra money for debt consolidation — paying down other high-interest debt, such as a balance on a credit card or loan — but this is a good idea only if the interest rate on your refinance loan is lower than your current loan. You could also use the cash to handle a financial emergency.

How much cash can I get with cash-out refinancing?

The amount of extra cash you can borrow depends on several factors.

• Your car’s value — Because you’re borrowing against your vehicle’s equity, your lender might require an in-person inspection of your car to assess its value.
• Your credit — If your credit is less than perfect, you may have a difficult time getting approved for an amount that’s much higher than your car’s value.
• The lender — Some lenders may set a limit on how much extra you can borrow through cash-out refinancing, while others may allow you to borrow up to 100% of the vehicle’s value — if you have the equity in the car. Be sure to do your homework beforehand to understand any loan amount restrictions.

Is a cash-out refinance loan worth it?

While a cash-out refinance loan may seem like an easy way to refinance your auto loan and borrow some cash, it could come with some drawbacks.

It may not fit your monthly budget.

If you aren’t able to get a better interest rate than you had on your original loan, refinancing probably isn’t a good option. That’s because you’ll likely increase the amount of interest you pay over the life of the loan. But even if you’re offered an interest rate that’s slightly lower, the terms of the new loan may lead to a higher monthly payment. You’ll have to decide what works for your monthly budget.

Here’s an example. Let’s say you took out a $20,000 auto loan with an 8% interest rate and 60-month term. Your monthly payment would be $406.

Then, a couple of years into your loan, you decide to get a cash-out refinance loan. When you refinance the roughly $13,000 remaining on the loan, plus $4,000 in cash — with a 48-month loan term and an interest rate of 7.5% — your monthly payment would be $411.

You run the risk of becoming upside down on your car loan.

When you owe more on your auto loan than your car is worth, you’re considered upside down on your loan. With cash-out refinancing, your risk of becoming upside down could increase, depending on how much you borrow against your car’s equity. This is because your car continues to depreciate, or lose value, over time.

Making extra payments or paying off your cash-out refinance loan early could help you avoid becoming upside down. But check to make sure your lender doesn’t charge a prepayment penalty fee — otherwise, you’ll have to pay a fee if you pay off your loan early.

You’re increasing your debt.

With a cash-out refinance, you take on more debt because you’re borrowing more than what you currently owe on your original auto loan. If you’re already struggling to make your car loan payments, increasing your debt could put you at greater risk of defaulting on your new cash-out refinance loan and having your vehicle repossessed.

What’s next?

Cash-out refinancing could be a way to get better loan terms and some cash in hand. But as with any loan, it’s important to shop around first to find the right refinance loan for you.

If you apply for prequalification and get prequalified with several lenders, it can help you gather and compare potential loan offers — typically without an impact to your credit scores. Just remember: Prequalification doesn’t mean you’re actually approved for a loan, and the terms that you see are estimates. But it can give you an idea of whether you might be approved and at what terms.

If you decide that a cash-out refinance loan isn’t for you, consider whether a personal loan might be a better option for getting some cash.