I would think that fees play a huge part in why alot of hosting companies want yearly payments. But on the other hand, it would be much easier and more flexible for the customer to go with monthly. Then, if they decided to upgrade their plan sometime throughout the year, the increase in payment would most likely be on the next monthly bill. If they are on a yearly plan and decided to upgrade, they would either have one lump sum to pay or even might have to wait until the next year to change their package. To me it would be best for both parties concerned for the hosting company to offer both types of payments and have the terms fully understood if the customer chose to change their package.

That is correct! I've also heard that some web host providers have many clauses in the fine print (which occasionally resulted in some pro-rated amount being forfeited). On the other hand, signing up for contracts not only gives great deals, but also many free add-ons like software packages. In short do spend some time online researching and finding out what your requirements ultimately are. If it comforts you, stick to the more reputable webhosts. Good luck!