Collateral protection insurance (CPI) is a type of insurance placed by a lender when a borrower fails to maintain the required insurance on a financed asset, such as automobiles or homes. CPI is designed to protect the lender’s financial interest, not the borrower’s in case the collateral is damaged or lost.
If you finance a vehicle or property, you usually agree to keep it insured. Lenders require full coverage car insurance to protect their interests in the collateral until the vehicle is owned outright. If your insurance lapses and you don’t send proof, your lender may add a CPI policy to your loan and charge you for it.
When you take out a loan, you agree to insure the collateral — the thing you bought with the loan, like a car. If you don’t keep your insurance active or fail to show proof to your lender, they may buy CPI and add the cost to your loan balance.
CPI is typically more expensive than regular insurance and may offer limited protection. It’s not meant to cover your personal injuries or liability just the lender’s risk of losing money if the asset is damaged or destroyed.
Lenders use CPI to make sure the property they financed is protected at all times. If the collateral gets damaged and there’s no insurance in place, the lender could lose money, especially if you default on the loan. It’s crucial for borrowers to provide proof of insurance with the lienholder identified so they don’t put CPI in place to safeguard the asset instead.
CPI usually covers:
Depending on the policy, CPI may include:
It does not typically cover:
CPI policies are not designed to fully replace your personal insurance. You may still be financially responsible for repairs, injuries, or accidents that CPI doesn’t cover. While CPI can cover the costs to repair collateral such as an automobile, it may not cover all repair expenses, leaving some costs to the borrower.
It’s important to remember: CPI protects the lender, not you.
If CPI is added to your loan:
In some cases, CPI can trigger loan default, repossession, or credit score issues if unpaid.
To avoid CPI, you must:
If your insurance is canceled, notify your lender and replace it immediately to avoid a CPI charge.
CPI usually takes effect:
It is crucial to obtain the necessary insurance coverage to avoid CPI. This includes both personal insurance and (CPI) to protect the credit union's interests. If you don’t have the right insurance, you could end up paying more out of pocket.
Some lenders send warning letters or emails before CPI is applied. Ignoring those notices can result in extra costs.
CPI is typically more expensive than personal insurance. The cost depends on:
Shopping for your own insurance gives you better options and often better prices than CPI. By comparing offers, buyers can potentially find more economical choices compared to collateral protection insurance, which often has non-negotiable premiums.
Unlike shopping for your own policy, you don’t get to choose the price — the lender does, and you’re billed for it.
If CPI has been added to your loan, you can remove it by:
Send proof of coverage to your lender as soon as possible, it could save you money.
Once your lender receives valid proof, they may cancel the CPI and issue a refund for any unused portion of the premium.
If you don’t pay the cost of CPI:
These terms are often used interchangeably, but here’s the difference:
Both are lender-placed policies that protect the lender when you don’t maintain your own insurance. Both are usually more expensive and offer less coverage than standard policies.
The cost of collateral protection insurance (CPI) can vary significantly based on several factors, including the value of the financed asset, the lender's chosen coverage, and the insurance provider. That being said, some companies might price this insurance around $150 monthly, whereas others could demand upwards of $500 or more. Generally, costs fall between $200 and $300.
Sources:
https://insurify.com/car-insurance/coverage/collateral-protection-insurance/
