What is collateral protection insurance?

Collateral protection insurance covers the remaining costs on a car loan if the borrower can't pay, including when a car is totaled in an accident. Lenders will often purchase CPI to protect themselves.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Written by Rachel Bodine
Insurance Feature Writer Rachel Bodine

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Jun 6, 2022

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Collateral Protection Insurance Summary
Collateral Protection InsuranceFrom the Experts...
Collision and Comprehensive insurance are typically required for financed vehiclesInsurance Information Institute
States like Texas specifically outline how and when collateral protection insurance can be appliedTexas Finance Code
Collateral protection insurance has generated extensive controversy in recent years due to unfair practices by lendersNational 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 and what are the penalties for driving without 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 car insurance protection, 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 a CPI policy.

What is CPI insurance?

What is CPI auto insurance? Is it different from regular auto insurance? How do you get rid of CPI insurance? Do you need a CPI policy? Is it required? These are all excellent questions to have, and you can read through the next few sections to find out the answers.

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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 insurance 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 with liability coverage that includes both comprehensive and collision.

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.

U.S. Average Annual Auto Insurance Rates by Coverage Type
YearsAverage Annual Liability Auto Insurance RatesAverage Annual Collision Auto Insurance RatesAverage Annual Comprehensive Auto Insurance RatesAverage Annual Full Coverage Auto Insurance Rates
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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 maintain the mandatory insurance coverage outlined by your loan on your own or did not provide proof of insurance. 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.

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 provide proof of insurance to 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 or provide proof of insurance, they will require CPI coverage instead.

CNAC is another lending institution through which you might obtain a loan. As you might expect, CNAC insurance is also a requirement if you fail to meet the insurance requirements outlined in the terms of your loan agreement.

The collateral protection insurance coverage ends when the borrower has fully repaid the auto loan balance. 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 auto 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 insurance 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.

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How much does collateral protection insurance cost?

As we’ve previously noted, a CPI program 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.

What is the 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 vehicle 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

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 the vehicle insurance, 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.

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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.

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