What is Collateral Protection Insurance?
Collateral protection insurance (CPI) protects lenders in the event that a borrower fails to secure auto insurance coverage.
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Collateral protection insurance (CPI) is a type of insurance designed to protect auto lenders. If a borrower fails to have an auto insurance policy on the vehicle the loan is covering, the auto lender can use this insurance policy to protect their financial interests.
Let's take a closer look at what CPI is, when it comes into play, and what it costs the borrower.
When is CPI Enacted?
Generally, CPI is enacted once a borrower fails to show adequate proof of necessary auto insurance coverage. Most auto lenders require borrowers to have collision or comprehensive auto insurance coverage until they pay their loan off. Lenders need to see proof of auto insurance, and if they don't, that's when the lender will take out CPI coverage and pass the cost of this policy along to the borrower. This makes it so if the borrower is in an accident and the car is damaged, the lender can recoup the value of the vehicle.
All of this means that the borrower will have to pay the CPI premiums, but they won't get the benefits of a claim—the lender will. At the end of the day, CPI is designed to benefit the lender, not the borrower.
How Does CPI Impact You?
In short, CPI may not impact you at all if you purchase proper auto insurance coverage and maintain it. If you have insurance lined up before leaving the dealership and avoid lapses in coverage, CPI may not ever be something you deal with.
You will need to provide the lender with documentation that shows you have car insurance coverage, such as your insurance cards that outline the start and end dates or a declaration page.
How is CPI Cost Determined?
How much CPI costs will vary depending on the state you live in and your lender. That said, CPI is generally much more expensive than purchasing an auto insurance policy on your own. Borrowers who fail to secure their own coverage are viewed as high risk by auto insurance companies, and as a result, they tend to charge higher premiums for CPI coverage. With CPI, you don't get to choose the type of coverage, which can also increase costs. When you look for your own auto insurance, you can shop around for the best deal.
Although prices for CPI coverage can vary greatly, let's look at an example and see how the costs can add up.
Let's say you canceled your auto insurance policy three months ago and your lender enacts a CPI policy that costs $200 a month. You would not only owe that $200 a month moving forward, but you would also owe $600 ($200 per missed month) to make up for the three months of missed coverage.
What Happens If You Don't Pay the CPI Put in Place?
If you choose not to pay the CPI put in place, you may run into big problems. To start, the lender can repossess the car. When your car is repossessed, not only do you lose the car, but this loss will be reported to the credit bureaus and will negatively affect your credit report for years. A low credit score can make it harder to qualify for future loans at good interest rates—such as a new auto loan.
If you do find you have to pay CPI and you'd rather not, getting it removed can be quite simple. All you have to do is secure an auto insurance policy that meets all coverage requirements stated in your auto loan contract and then send proof of this coverage to the lender. Once the lender confirms coverage, they will cancel the CPI policy.
If the lender made a mistake and they purchased a CPI policy even though you had appropriate coverage in place, you can qualify for a refund if you ended up paying the CPI premium. To get the refund, you will have to provide proof to your auto loan lender that you were, in fact, insured during the required period.
Collateral protection insurance is not a requirement, and it's something you can easily avoid if you take the right steps to protect yourself and the lender.
