If you’ve ever financed a car, you probably know that the lender requires you to provide insurance coverage for the vehicle. They do this to protect their own interest in the car while you are paying back the loan. But some owners either never purchase the insurance or let it lapse. This is where collateral protection insurance comes in.
While you may not have heard of it, collateral protection insurance, or CPI, has some controversy surrounding its use. Read on to find out what collateral protection covers, when you might have to pay for it and how to avoid it.
What Does Collateral Protection Cover?
When you take an auto loan, you usually have to purchase physical damage coverage for the car and name the lender (bank or other financial institution) as an interested party on the insurance policy.
Collision and comprehensive coverages are the physical protections you are required to purchase. Collision protects against damage caused by hitting another object such as another car, a telephone pole or a wall. Comprehensive coverage takes care of other forms of physical damage such as vandalism, animal strikes or storm damage.
If you do not meet these physical damage protection requirements, you may find yourself with collateral protection insurance slapped onto your lender’s account. CPI typically stands in for your own lack of coverage and protects the lender’s interest if there is physical damage to the car. Some types of CPI also include liability coverage.
How does collateral protection work?
Here is where the controversy comes in. Generally, the collateral protection insurance provider works with the financing companies and tracks their portfolio of loans. The CPI provider will verify that each borrower has obtained proof of insurance. If not, they attempt to notify the borrower that they need to do so immediately. If the vehicle is not properly covered and the borrower fails to protect the car, the lender can then add CPI to the loan in order to protect its own interests.
The worst part is that you will then see your loan payment automatically increase to cover the cost of the CPI. You are obligated to pay this added cost.
How Much Does Collateral Protection Insurance Cost?
While premiums vary, CPI is almost always more expensive than regular auto insurance that you purchase yourself. Therefore, it’s a no-brainer that if you are hit with CPI you should quickly make things right by purchasing your own coverage as soon as possible.
How to Avoid Paying for CPI
As you may have guessed, to avoid being forced to pay for CPI you simply have to meet the lender’s physical insurance requirements. If you have a lease or a loan, make sure you get physical protection car insurance (collision and comprehensive) and keep it for the duration of your lease or loan term.
And if you do need insurance, use the InsuranceWins form to receive current quotes from well-known companies. Get started now to avoid CPI and find the best rate for your auto insurance.