UPDATED: Jun 29, 2020
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|Collateral Protection Insurance||From the Experts...|
|Collision and Comprehensive insurance are typically required for financed vehicles||Insurance Information Institute|
|States like Texas specifically outline how and when collateral protection insurance can be applied||Texas Finance Code|
|Collateral protection insurance has generated extensive controversy in recent years due to unfair practices by lenders||National Association of Insurance Commissioners|
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Let’s say you buy a vehicle from a dealership. You finance the vehicle. Then, you get into a car accident. Normally, your car insurance would cover these damages. But what happens if you don’t have car insurance? The damages are covered out of the value of the vehicle, which would normally cause the auto loan lender to lose money.
What is collateral protection insurance (CPI)? CPI is used by auto loan lenders to protect themselves from financial losses in the event of an accident.
With collateral protection insurance, the lender can cover the costs without losing money. The collateral is protected from being used to cover the damages. The collateral, in this case, is the vehicle. So how does collateral protection insurance work and what does it cover? Keep reading to learn more.
Why not take a moment to get a free quote on auto insurance just by using your ZIP code? If you have full coverage, you may not need CPI.
Collateral Protection Insurance and Auto Insurance
What is CPI auto insurance? Is it different than regular auto insurance? How do you get rid of CPI insurance? Do you need CPI? Is it required? Read through the next few sections to find out.
What insurance is required for a car loan?
In order to legally drive in the United States, most states require a minimum amount of liability coverage, which varies by state.
Typically, the terms of a car loan require you as the borrower to maintain a certain level of insurance coverage, beyond that required by the state in which you live. In general, the lender will expect you to purchase a policy that includes both comprehensive and collision coverage.
Take a look at this video to learn more about comprehensive coverage.
Watch this video to learn about collision coverage.
Why is this insurance coverage required? If the borrower gets into an accident, the car insurance will cover the damages and reimburse the lender for the value of the vehicle (the unpaid amount of the vehicle loan). Once the borrower obtains auto insurance coverage, they must send copies of the auto insurance documents to the lender. Then the lender will verify the insurance is valid.
The table below will give you an idea of what your average annual auto insurance rates may be.
|Year||Annual Liability Auto Insurance Rates||Annual Collision Auto Insurance Rates||Annual Comprehensive Auto Insurance Rates||Annual Full Coverage Auto Insurance Rates|
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After the insurance documents are verified, the borrower can continue paying off the auto loan without CPI. But what happens if you can’t maintain the collision and comprehensive coverage defined by the terms of your loan? That’s where CPI comes in to play.
How Does Collateral Protection Insurance Work?
Collateral protection insurance is also known as lender-placed insurance or forced car insurance. The lender is ‘forcing’ you to buy car insurance to abide by the terms of your loan. If your auto loan is from DCU, for example, it may include DCU credit protection insurance.
Essentially, the bank added insurance to your loan to protect your collateral, because you were unable to the maintain mandatory insurance coverage outlined by your loan on your own. Read on to find out what forced insurance covers.
Some states specifically define when and how CPI can be applied. For example, collateral protection insurance in Texas is outlined and governed by the Texas Finance Code.
Auto loan lenders will buy collateral protection insurance on a vehicle when necessary. However, if the insurance proves to be invalid, or if the borrower does not buy auto insurance by the lender’s deadline, then the lender might increase the borrower’s monthly payments to cover CPI, which the lender buys from a separate company.
Instead of paying $400 per month for your car loan, for example, you might pay $450, with the extra $50 covering rates for CPI. If you later buy car insurance and verify that car insurance with your lender, the lender will remove the extra fee. Some lenders will also refund premium payments made by the borrower up to that point.
If the borrower removes auto insurance coverage or lets the car insurance lapse, then the lender may reinstate the added rates at a future date.
America First is an example of a lending institution from which you might obtain a loan to buy a vehicle. They require both collision and comprehensive coverage with at least a $1,000 deductible. If you fail to maintain this coverage, they will require CPI coverage instead.
CNAC is another lending institution through which you might obtain a loan. As you might expect, CNAC collateral insurance is also a requirement if you fail to meet insurance requirements outlined in the terms of your loan.
The collateral protection insurance coverage ends when the borrower has fully repaid the auto loan. At this point, the lender no longer owns the vehicle, and the vehicle owner fully owns the vehicle. There’s no need for collateral protection insurance because there’s no collateral and no loan remaining.
What does collateral protection insurance cover?
CPI covers damages that occur when a borrower gets into a car accident, including damage to the other vehicle and medical costs incurred by the other driver or passengers.
CPI covers both the borrower and the lender. Most collateral protection insurance policies will pay off the remaining auto loan balance, for example, if the car is totaled during a collision.
Specific collateral protection insurance coverage limits vary from state to state. There are different collateral protection insurance companies, and each company may work in a different way.
Generally, however, collateral protection insurance covers all of the following:
- Physical damage to either vehicle involved in the accident
- Medical expenses and legal costs resulting from the accident
- The remaining auto loan balance (if the vehicle is beyond repair)
Some collateral protection insurance covers both the lender and the borrower. Other collateral protection insurance, however, is called ‘single-interest insurance’ because it exclusively protects the interests of the lender.
How much does collateral protection insurance cost?
As we’ve previously noted, CPI typically costs more than the rates you’ll pay for a traditional insurance policy. The rate you’ll pay is calculated based on the value of your vehicle and the total amount you owe. And as we also noted, the rate for CPI will be added to your monthly loan payment. Enter your zip code below to view companies that have cheap auto insurance rates. Secured with SHA-256 Encryption
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Collateral Protection Insurance Controversy
CPI has a negative reputation among some car buyers. Over the past few years, there have been several major controversies involving US auto sales and collateral insurance.
For example, lenders have been caught taking commissions from CPI providers based on how many drivers had to pay for insurance. This practice isn’t technically illegal. However, negative media attention over this issue has convinced some car dealerships to drop the practice.
There have also been several high-profile lawsuits over CPI in recent years, such as the Wells Fargo collateral protection insurance lawsuit. Car dealerships and lenders have been accused of not disclosing sufficient information to borrowers.
One of the biggest problems with CPI is that borrowers are often forced to pay larger premiums than what they would normally pay. If you would normally pay $80 per month for car insurance, for example, then your CPI rate might be $150 per month.
Shady practices by car dealerships and car loan lenders have given CPI a negative reputation. However, when used transparently, CPI provides valuable protection to both the borrower and the lender.
Some companies who have realized their error in relation to CPI have done their best to make it right. For example, collateral protection insurance from Wells Fargo may have included unnecessary charges, so they have instituted a program that offers refunds to eligible customers.
The Bottom Line for CPI and Auto Insurance
When you sign a car loan, you’re agreeing to buy insurance for that vehicle. The lender can do this because you don’t fully own the vehicle: the vehicle is ‘collateral’ in a loan between you (the borrower) and the lender.
Lenders will purchase CPI to protect the collateral from any potential losses. If the borrower fails to maintain insurance on the vehicle, for example, and your car got totaled in a car accident, the lender will rely on CPI to cover the loss.
When signing a car loan, make sure you fully understand the terms of the loan, including any requirements involving CPI.
Frequently Asked Questions: Collateral Protection Insurance
Still have questions about CPI? Read through these frequently asked questions to learn more.
What is ‘buy here pay here’ collateral protection insurance?
Collateral protection insurance from Buy Here Pay Here dealers is structured such that the dealer is the insured, rather than the borrower. In this case, you as the borrower may specifically opt to purchase CPI through the dealer, rather than obtaining your own, separate insurance.
The selling point is that if your driving record is particularly poor, it may be more affordable to obtain CPI through the dealer than purchasing a traditional insurance policy (the higher risk you are, the higher your traditional insurance rates will be).
What is collateral security?
As defined by The Law Dictionary, collateral security is a second level of protection often required by lenders to ensure that you as the borrower will pay off your loan. It is usually in addition to the collateral of the item itself (the vehicle, for example), which is usually referred to as the primary security. By contrast, CPI is insurance on the primary security, while collateral security is a second level of collateral, beyond the asset itself.
What is a CPI premium add on?
The CPI premium add on refers to the addition of the cost of CPI to your loan payment, as we described earlier. This will only occur if you don’t maintain the required insurance coverage outlined in the terms of your loan or if you choose to add CPI coverage to your loan, rather than obtaining traditional insurance coverage (as we discussed in the previous section).
What is IP Collateral Protection Insurance?
If you own intellectual property (IP), you can choose to use it as collateral for a loan. IP collateral protection insurance is insurance on the IP you’ve used as collateral.
Do I need full coverage on a financed car?
Yes, generally you will be required to carry full coverage auto insurance on a financed vehicle.
Make sure you have enough coverage so you don’t need collateral protection insurance. Before you go, use your ZIP code to get a free quote on auto insurance.