Buying auto insurance is not the one-step process that people want it to be. Understanding the many variables involved can save you money and headaches down the road, but one key point that is often overlooked is the deductible. In this article, we'll discuss what it is and why it's important.

Auto Deductibles in 150 Words

For those familiar with health insurance, this should be an easy concept. An auto deductible is the money that you have to pay before your insurance kicks in and lends a hand.

If you're involved in an accident that causes $5,000 worth of damage and your deductible is $500, then you are on the hook for that first $500 before your insurance takes care of the rest. You can look at the $500 deductible as an entry fee before your insurance will buckle down and decide to pay the claim.

So, knowing that, it's clear that a low deductible is great for keeping the financial burden off you—right?

Unfortunately, it's not that simple. There are pros and cons to each option. The ones we'll discuss below apply to everyone, not just a specific group. Auto deductibles are all about finding that sweet spot for your specific situation, and then sticking to it.

A High Auto Deductible

Now, this is going to sound a bit strange to some, but paying a higher deductible might be the best option.

A higher deductible leads to a lower monthly auto insurance costs, for the obvious reason that the insurer then needs to cover less of the car’s assets in the case of a repair. This means that all of the money saved over the course of the lower-cost insurance contract could potentially go directly to a repair, assuming you have been banking it all.

High auto deductibles are best for drivers who have money stored away in a “rainy day fund” to take care of emergencies. Since whatever you are saving per month can be wiped out with one accident, depending on that savings to pay other bills is a big gamble. Use it to balance out your finances, but never as a crutch unless you are putting away the money you save each month.

A Low Auto Deductible

Low deductibles are the most common ones. But when purchasing a brand new car leaves your finances drained, what's the smart choice?

A low deductible will keep you from paying a large amount of money upfront to repair your car. But a high deductible will lower the cost per month so you can maintain a brand new car. That could cover gas, upgrades, and general maintenance.

The reason most first-time buyers settle for a low deductible is because it is a long-term option. This is true for single students purchasing a car for school or large families purchasing a minivan.

A mistake can happen on the road, even if it isn't your fault. How much can you realistically pay without disrupting the rest of your life? What would you do if your car was totaled and you had no money to repair it or purchase a new car? Opting for a low deductible is playing the long game, and is considered the safest option for drivers without a rainy day fund.

Conclusion

Having a clear picture of your finances will help you to determine which auto deductible works best for your situation. There are no winners when your car is damaged and needs repair, but at the very least being prepared can keep you out of financial trouble.