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When you buy or lease a car, you’ll probably be told that you need full coverage auto insurance, including collision and comprehensive coverage. Lenders usually require this to protect the vehicle until you own it outright. However, if you are unable or unwilling to receive full coverage, your lender may purchase Collateral Protection Insurance (CPI). This type of insurance covers your vehicle but does not provide the same liability or medical coverage as full coverage auto insurance. Additionally, even if a lender purchases it, you will have to cover the bill. Bankrate’s insurance editorial team explains the key differences between these policies to help you better understand your options.
What is collateral protection insurance?
Collateral insurance is a type of auto insurance associated with auto financing and is intended to provide financial protection to the lender. If the borrower is unable or unwilling to secure its own full coverage auto insurance policy that includes comprehensive and collision coverage to protect against physical damage to the vehicle, the lender may instead provide collateral insurance coverage. You may choose. However, it’s important to note that the costs that are added to the monthly car loan payment are typically borne by the borrower.
The main rationale behind this practice is the lender’s desire to ensure that the vehicle that serves as collateral for the loan is insured against potential accidents and damage. One drawback for the borrower is the limited flexibility that comes with collateral insurance. Your options are typically predetermined by your lender and are designed to protect their interests rather than yours, so we may not be able to provide you with the most cost-effective or customized coverage .
Collateral protection vs. compulsory insurance
Compulsory insurance and collateral protection are similar. Both are designed to provide insurance if the borrower is unable to secure coverage on their own. However, there are some differences between the two terms. Compulsory insurance is a broad category that can be applied to different assets such as homes and cars depending on the scenario.
Collateral protection applies specifically to vehicles. Essentially, all collateral protection insurance can be considered a form of compulsory insurance, but the reverse is not necessarily true, as compulsory insurance can also apply to assets other than automobiles. there is no.
How does collateral insurance work?
Collateral protection insurance is a specific type of insurance tailored to financially protect you and your lender from physical damage to your vehicle. If you are a buyer who finances your car and only carries liability-only insurance with minimal coverage, damage to your own car will not be covered (if someone else owns you Unless you hit it and that insurance covers it). That’s why most financial institutions require full coverage auto insurance, including comprehensive coverage and collision coverage to cover damage to your car. If you are unable to obtain traditional full coverage auto insurance, or if the coverage you choose does not meet the lender’s requirements, CPI insurance will be selected by the lender and added to your loan payment.
Financing a car comes with special responsibilities. Apart from regular monthly payments, lenders usually require borrowers to purchase certain types of insurance. This is because the car technically remains the property of the lender until it is paid off in full. If the renter does not have proper insurance and the vehicle is damaged, the financial loss affects both parties. In these situations, CPI can step in and help ensure that the damage to the vehicle that serves as collateral for the loan is covered.
One of the challenges with CPI insurance is that premiums are generally non-negotiable and are not always the most economical option. If you buy car insurance for your financed vehicle yourself, you can explore the market, compare offers, and potentially discover more competitive rates.
It is also important to note that CPI coverage is limited to the specifications of your loan agreement. If you’re looking for more comprehensive coverage, or what’s called full-coverage auto insurance, it includes not only protection against physical damage, but also coverage for things like liability and theft. Protecting your insurance allows you to tailor coverage and limits to your specific needs and preferences.
What does CPI insurance cover?
Collateral insurance primarily provides financial protection against physical damage to your car. Its core usually includes collision and comprehensive coverage. Depending on the details of the package your lender selects, it may also offer protection against medical expenses and liability. Below we detail some of the common scenarios that most collateral protection insurance covers.
Collateral protection refund
Errors can occur in any financial process, and in some cases, lenders may require borrowers to purchase CPI insurance even when it is not required. If you find yourself in a situation where you are incorrectly requested to purchase CPI, there are steps you can take to correct the situation.
- Insurance card: The first step is usually to present a valid proof of insurance to the lender, proving that your vehicle is already covered by the type of coverage required by the lender for the period in question. In some cases, it may be sufficient to view the insurance policy declaration page. This page provides detailed information about your coverage, including the type of coverage you purchased, term of coverage, and limits.
- Insurance agent contact information: If your financier is still not convinced, you may need to facilitate communication between your financier and an insurance company representative who can confirm your auto insurance coverage.
Once the lender is satisfied with the evidence and confirms the existence and details of independent insurance, the CPI claim should stop. However, please note that there may be periods during which you did not have a valid insurance policy. For certain days or months, your financial institution may charge CPI as a back payment for your insurance. This means that even if you later secure insurance, you may still have to pay the CPI amount for the period your vehicle was uninsured.
Always maintain open communication with your lender. If you start or change your insurance policy, notify your policyholders immediately. This proactive approach helps avoid unnecessary additional costs and complications.
