Lenders employ collateral protection insurance to safeguard themselves in the event that a borrower of an auto loan does not maintain auto insurance on the vehicle covered by the auto loan. The insurance frequently costs far more than a personal motor insurance policy that you could buy, and it only protects the lender and not you.
Definition and Examples of Collateral Protection Insurance
When a borrower fails to present proof of insurance, both mortgage lenders and auto lenders turn to collateral protection insurance. Other names for this type of insurance are lender-placed insurance, creditor-placed insurance, and force-placed insurance.
This type of insurance coverage is bought by a lender to safeguard itself against the potential loss of the vehicle in the event that the borrower fails to provide evidence of sufficient insurance, or if their policy has lapsed or been canceled. According to the loan agreement, you must typically maintain a specific amount of auto insurance.
Legally, lenders have the power to buy insurance to safeguard the collateral and to charge the borrower for it.
If your lender obtains collateral protection insurance for your car, you will be responsible for paying the premiums, which are often included in your monthly loan payment.
- Acronym: CPI
- Alternate names: forced car insurance, lender-placed insurance, creditor-placed insurance, force-placed insurance
How Collateral Protection Insurance Works
Auto loans typically mandate that the borrower maintain collision or comprehensive auto insurance, at least until the loan is repaid. The lender requests proof of insurance from the borrower, and if none is provided, the lender will first remind the borrower that it is necessary to provide such proof.
After such a warning, the lender may decide to insure the car against collateral loss if the borrower still cannot provide sufficient proof of insurance. The borrower is subsequently charged for this coverage.
Up to the current value of the auto loan, this type of insurance will replace or repair any damage to the vehicle. But keep in mind that this protection is primarily for the lender’s benefit, not your own.
With collateral protection insurance, the lender is confident that, in the event of an accident, it will be able to recover the value of the car. However, you will continue to pay premiums without ever receiving a benefit from a claim.
Is Lender-Placed Insurance Legal?
Lenders are permitted by the federal Consumer Financial Protection Bureau (CFPB) to apply CPI on borrowers who fail to produce sufficient insurance documentation. It’s crucial to keep in mind that the state minimums for the auto insurance coverage might not be adequate to satisfy your lender’s coverage needs. Some lenders will monitor the insurance coverage on the vehicles they have financed to see if any borrowers have let their policies lapse or have neglected to obtain one.
Despite having the option, your lender must provide you prior notice before adding collateral protection insurance to your loan. To start, your loan agreement is likely to include language allowing the lender to impose CPI in the absence of acceptable insurance proof. Additionally, the CFPB mandates that lenders provide warning forms to uninsured borrowers so that they can resolve the issue before to the lender purchasing a CPI policy.
How Much Does CPI Coverage Cost?
State-by-state and lender-by-lender variations exist in CPI fees. However, you should anticipate that CPI will be far more expensive than independent auto insurance. There are several causes for this.
In the first place, there is no chance for you to compare prices. You receive the insurance that the lender selects. The prices for CPI coverage are typically higher since insurance companies view borrowers who do not have their own coverage as higher risk.
Despite the fact that this type of insurance is more expensive than getting your own coverage, keep in mind that failing to pay CPI could result in the lender seizing your car.
How to Avoid Forced Car Insurance
The insurance requirements stated in your loan paperwork should be satisfied by purchasing your own auto insurance and adding the lender to your policy as the lienholder. This will protect you from having auto insurance forced upon you. In order to avoid having to pay for CPI coverage during the lapsed period, make sure your coverage is never interrupted, even for a brief time.
Give your lender the papers demonstrating that you have appropriate insurance in place and ask them to cancel the CPI policy they acquired for your car if you were inadvertently charged for it. Even if the lender is at fault, you should still be sure to pay the CPI premiums while the error is being fixed because failing to do so could result in the repossession of your car.
- A lender may purchase collateral protection insurance to safeguard itself against the loss of a borrowed car in the event that the borrower does not get sufficient insurance coverage.
- The purpose of this insurance is to protect the lender, not the borrower, and it is more expensive than the auto insurance coverage the borrower could get on their own.
- In the event that the borrower fails to show proof of insurance, lenders are legally permitted to impose CPI coverage. In the loan agreement and through inquiries for proof of insurance, the lender must nevertheless give the borrower a reasonable heads-up.
- By getting your own motor insurance and ensuring there are no lapses over the loan’s term, you can avoid CPI.