Written by PAYD insurance – also known as pay as you go, pay per kilometre and usage-based car insurance – is a type of car insurance that calculates premiums based on the actual distance driven, charging drivers for the number of kilometres they travel.
Designed for cars driven less than the average amount per year (usually under 15,000km), PAYD plans generally offer the same level of coverage as a more traditional insurance policy. The difference is that the cost is based on how much you drive. Depending on the policy, drivers will either provide information about their estimated annual mileage or have it tracked in real time, with their insurance premiums determined accordingly.
The thinking behind this is that the less you drive, the less likely you are to get into an accident on the road, reducing the chances of your insurance company having to pay out a claim.
In Australia, two main methods are used to track the distance driven:
- Odometer readings: drivers decide their intended usage – under a set number of kilometres in a month or year – and provide their insurer with an initial odometer reading, which is used to calculate the insurance premium. Additional odometer readings will usually be required with photo evidence, sometimes monthly, including at the end of the policy period. In Australia, this is currently the most common way to track distance travelled under a PAYD car insurance policy.
- Tracking device: in some cases, a GPS or telematics device is connected to your car and tracks the exact number of kilometres driven in real time. This information is used by the insurer to determine how much you’ll pay for cover. This type of policy is commonly split into two parts: an upfront fee to cover insurance while parked and potentially the cost of the device, and a per-kilometre rate based on how much the car is driven, often charged monthly. This method is less common than manual odometer readings.
Can pay as you drive car insurance save me money?
If you’re a driver who uses their car less than average, you could pay less if you take out PAYD car insurance, as it’s generally cheaper than a standard comprehensive car insurance policy. By tracking your mileage, your insurer can calculate your premiums based on your specific driving habits, meaning you only pay for what you need.
However, if you exceed your kilometre range or need to extend it, there’s a risk your premiums will increase or you'll be charged an additional excess if you make a claim.
The actual cost savings will depend on your driving habits, mileage and insurance provider, so it’s worth comparing different insurance options to help determine which PAYD policy is the most suitable for your needs.
When might pay as you drive car insurance be suitable for me?
PAYD car insurance is designed for those who drive their car less, such as:
- Weekend drivers: these may be people who use public transport, work from home, cycle or walk to work during the week.
- Retirees: with no daily commute and potentially fewer long road trips, senior citizens often drive less than working adults.
- Multiple car owners: if your household has multiple cars, there’s a chance they have a lower kilometre count per year than households with one car that does the bulk of the driving.
However, due to limits on kilometre usage (usually less than 15,000km a year), this kind of insurance may not be suitable for everyone, such as if you use your car more often than the average driver over a 12-month period. Before buying car insurance, it is important to assess your needs to ensure the policy meets your requirements.
What can I do if I reach the distance limit on my pay as you drive policy?
Due to the low mileage restrictions that characterise PAYD car insurance plans, it’s important to monitor your usage to ensure you stay within your limits. If your driving habits change and you think you may exceed the distance limit, you should contact your insurer to see if you can increase it (which most insurers will enable you to do). However, your premiums may increase as a result or, depending on your circumstances, you may be required to take out a new policy.
If you’re over your odometer limit and need to make a claim, you may be charged an additional excess. It’s therefore important to keep your insurer updated on any changes to ensure you are appropriately covered.
The pros and cons of PAYD car insurance
Common questions about PAYD car insurance
If you find you’re driving much less than anticipated, you might be able to adjust your policy and access cheaper premiums from your car insurer. Keep in mind that you should always update your insurer if your driving habits change to avoid the risk of extra fees or a higher claims excess.
If your odometer breaks or is faulty, you should inform your insurer as soon as possible and get it repaired. Failure to do so could lead to an additional excess, and if you are found to have manipulated or tampered with your odometer, you could even have claims denied. Your insurer may also request to inspect your car or see its service records.
As with other car insurance policies, you should be able to switch policies from your PAYD insurance to a different policy before the renewal date. However, keep in mind that you may be charged exit fees and administration costs if you cancel after your cooling-off period.
If your car has a GPS or telematic device fitted, this will track the distance you travel, feeding the data back to your insurer. However, it may also collect information about where you have been, dates and times of travel, speed and car handling, and other details about your vehicle. Your policy will outline what data is or may be collected and how it could be used; if you have any concerns, you should contact your insurer directly.
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