Bill-paying convenience -- for a price

By Liz Pulliam Weston

Ah, the convenience fee.

If you have a big bill -- auto insurance, home insurance, life insurance, property taxes, whatever -- chances are you have options on how to pay it: annually, semiannually, quarterly, monthly.

Paying it more frequently may involve a cost known as a convenience fee, which is usually $1 to $3 a month. Those of us who fancy ourselves savvy about money tend to balk at paying such fees.

But maybe we need to rethink this.

Rising interest rates and the sheer expediency of paying bills in smaller chunks, rather than facing one big tab, can sometimes make paying those fees worthwhile.

Let's say you had a $1,200 annual auto-insurance bill and that your insurer would charge $2 a month if you opted to pay the bill monthly by automatic debit from your bank account. You would save $24 in annual fees by paying the entire bill in advance.

But if that $1,200 were placed instead into a money-market account earning 4% and you transferred $102 to your checking account each month to cover the bill, your interest earnings would offset all but $2 of the fees.

Plus, you wouldn't have to scramble every year to come up with the cash to cover the whole premium.

$3.50 for the privilege of paying monthly

The interest issue isn't a small one, at least not for the insurers and others that charge these fees, explains Loretta Worters, a spokeswoman for the Insurance Information Institute. Convenience fees are typically designed to make up for the interest the companies forgo by not getting your money all at once and for the added cost of processing more-frequent payments.

On the Your Money message board, a poster who goes by the name centaur sees the financial advantage of having automatic monthly payments for home and auto insurance.

"This works well for me and theoretically should save me a penny or two since the normal billing was twice a year and you paid ahead," centaur wrote. "Now I pay ahead one month and have that money working for me a bit longer."

Other folks on the Your Money message board who opt for monthly payments do it primarily for budgeting convenience. As poster avalon_2 put it, monthly auto payments are "just more comfort and less thought for me."

"I guess I like the David Bach method of having everything done automatically," agreed Mikey02, referring to the author of best-selling books "The Automatic Millionaire" and "The Automatic Millionaire Homeowner," who advocates automating bill payments, savings deposits and investments. "That way I don't have a chance to spend my money until all the necessary bills are already paid."

Some say they find it otherwise impossible to come up with the scratch to cover a large bill.

"With two children, (one in day care), medical bills and the other 'unexpected' expenses that crop up, it was nearly impossible to set aside the amounts we needed in order to have the cash on hand when we needed it," poster bookladyfdl wrote. "I had our agent lump the premiums together and now make a monthly payment. I get paid bi-weekly, so I have set up an auto-pay to the insurance company for half of the monthly amount. … I no longer have the stress of wondering where I'm going to find $500-$700 next month when the insurance premiums are due. That's worth $24 (in annual fees) to me!"

Other posters, though, prefer to set aside savings each month to cover their big bills, and some find convenience fees extremely annoying.

"The mere memory of the fees that my automobile insurance wanted to charge for monthly billing has deadened my interest," wrote haapai. "Those jerks wanted to charge me $3.50 a month for the convenience of paying my $810 semi-annual premium monthly! The memory makes me so angry that I can't even read the details of the auto-debit program that they offer now."

Your home is different

One area where the convenience of paying monthly may not be such a great deal for consumers: the impound accounts (also known as escrow accounts) that are offered, and sometimes required, by mortgage lenders.

In this case, the money for your big home-related bills -- your annual homeowners insurance premium and your semiannual property-tax payments -- is collected from you in advance by the lender and set aside in an escrow account.

Lenders typically require impound accounts if borrowers put less than 10% down, but some homeowners voluntarily opt to have the accounts, and others don't realize they have a choice.

The impound system works for lenders because they want to make sure these important bills get paid. If your uninsured house burns or the county assessor seizes it because of unpaid taxes, the mortgage lender is likely to get stiffed.

But it's not always a great deal for homeowners. Some of the problems with this approach:

• You may be missing out on interest. Some states require lenders to pay interest to the borrower on these escrow amounts, but others don't. Depending on the amounts involved, the forgone interest can be tens or even hundreds of dollars a year.

• Your payments can change frequently. Mike S. wrote about his odyssey with his lender: "During my first year of ownership, they had miscalculated the monthly escrow amount. A year in, when the tax bill came due, they figured it out. They discovered there was a short fall, billed me for it, and corrected the escrow amount which ultimately changed my monthly mortgage payment. A year later, my taxes went up and we went through the same drill all over again. I've had the mortgage for 3 years. In that time I've had 3 different payment amounts and had to pay two shortfalls. Not a big deal, but it's sort of annoying."

• You've lost control of the bills getting paid. Poster hinsha related her family's nightmare when her lender failed to pay a property-tax bill on time. "We didn't know anything about it until the county sent us a notice that our house would be tax auctioned if we didn't pay in 7 days," hinsha wrote. Fortunately, hinsha staved off the fire sale by raising Cain with the mortgage company, which sent an overnight payment to the county.

Cal Gal didn't have to rescue her home from auction, but her lender repeatedly tried to dun her for its own mistakes.

"Several times the lender paid property taxes late and then wanted ME to pay the late charges to the county," she wrote. "Excuse me, but you've had my money and you don't pay the bill and you want me to pay the late charge. I don't think so. I finally got so I was calling to make sure the payment was made on time."

Poster amc1232000 said she and her husband had weighed the pros and cons of using a lender's escrow account and decided to instead create their own.

"My husband and I opted to set up a money-market account where we make monthly deposits by auto-pay (we set the account up as a "bill" in our bank online bill payment system, and pay a little more in than what is actually needed to cover the taxes)," she wrote. "When the tax bill comes due, we just write the check from the money-market account. No big hit on our budget, same convenience of escrow, we keep any interest earned."

If you've already got an escrow or impound account, though, getting rid of it might not be easy. A lender may require you have 20% or more equity in your home before it will agree to let you take over, or may refuse to drop it at all -- requiring you to refinance if you want to handle the tax and insurance bills on your own.

Then again, you might decide an escrow account isn't that bad. Poster spell has done it both ways and actually prefers having an escrow account despite some problems.

"The trouble with having escrow, I found, was that I didn't pay enough attention to my (property) tax bill," spell wrote. "One year, I almost forgot to renew my homestead exemption (state laws that reduce the taxable value of a primary residence). Luckily, I caught it soon enough to get the money back, (but) the four-month wait for the check taught me to read more carefully."

When spell refinanced the loan, he insisted on handling the property-tax and homeowners-insurance bills himself. The lender initially resisted "but caved without much of a fight." Now, he's back to having an escrow account.

"With a new mortgage on my current home, I let them sign me up for it again," spell wrote. "It just seemed like one less thing to manage. They do an OK job of running it and I learned my lesson about paying attention to the tax bill."

The bottom line from all of this? There's no one right way to handle big bills. Smart people tackle them in different ways, weighing cost, control and convenience before choosing the route that works best for them. What's important is:

• Know you have a choice. If you have a down payment of 20% or more, for example, you should be able to say no to an impound account if you wish. If your lender wants to charge you a higher rate -- and some will try -- understand that this higher rate is probably negotiable and that you can find another lender who won't penalize you if you shop around. Meanwhile, most insurers offer a variety of payment plans, so if the one you're on doesn't work for you, explore your options.

• Set up a system that works. Monthly payments might be the best choice for folks who have trouble managing their cash flow. If you decide to pay bills annually or semiannually, you'll need to make sure you set aside an appropriate amount of money each paycheck to cover the eventual bill. Your best bet: setting up automatic payments or transfers that put the money in a designated account, preferably one that earns a decent rate of interest, until the bill needs to be paid.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.