Throughout your life, you'll be extended prorated offers, which are goods or services that are temporarily discounted based on the timing of your purchase, explains GoCardless.com. Understanding a prorated payment meaning and how to calculate these amounts will help you choose the best offers for you and make it easier to update your budget more accurately.
Read More: How to Calculate the Prorated Amount
How Do You Prorate?
If you want to pay for a 2021 subscription but are starting your subscription on August 1, how much will you pay? If you get a one-year subscription at full price that runs from August 1 to July 31, you are taking a full, one-year subscription. If you take a discounted five-month subscription that ends on December 31, you are getting a prorated subscription.
Read More: How to Calculate Prorated Rent
How is Something Prorated?
Companies often prorate amounts by dividing the remainder of a contract by the full month's or full year's cost. For example, you might want to join your industry's trade association. It's often easier for the association to collect all its dues at one time, so their $120 annual memberships start on January 1 and end on December 31.
What happens if you want to join on August 1? The association will prorate your membership by dividing $120 by 12 months to get a $10 monthly cost. If your first year's membership payment will cover you for five months (August 1 to December 31), your membership will be prorated to $10 X five months = $50. You will pay $120 on January 1 for next year's full-year membership.
In some cases, to make things easier, businesses will not use an exact mathematical formula for prorating goods and services. For example, if you want to join your trade association on August 13, the association won't have a daily prorated membership number. They might simply offer four prorated membership amounts that cover anyone who joins at any time during one of those four quarters.
Or, they might charge the full month's fee regardless of when you join during that month. On the other hand, rents are often prorated to the day you move in, so you only pay for the days you live in the apartment or house. Common prorated services include subscriptions, memberships, rents, cable, internet, storage units and phone fees. Several aspects of a real estate transaction are often prorated after a sale, such as property taxes and insurance.
When considering paying a prorated amount, it's a good idea to find out if it's worth holding off on signing up for a few days or weeks so you don't pay for services you won't use much that first month you sign up. You don't want to pay for something that will cost you much more than normal just to get those few days or one week of service/membership. That's often the case with prorated storage units.
Watch Out For Penalties
When a company offers you a prorated payment, it often does so because you are agreeing to re-sign your agreement. If you do not, or you downgrade your services, you might need to pay a penalty, which is normally the full amount. If you are signing up for a monthly subscription, for example, ask what will happen if you cancel your contract early.
You might add a football package to your cable services, thinking you can cancel after the end of the fall football season. If you received a discounted or prorated amount when you signed up, you might have to pay a penalty, making keeping the package for the entire year the best option (you have to pay the full amount, but now you at least get the replays and other content).