If you buy a car with an auto loan, your lender will likely require you to maintain collision and comprehensive insurance, along with the liability coverage required under state law. But what happens if you don’t maintain this coverage? Your lender may take out a collateral protection insurance policy on your car – and this is something you don’t want to happen.
What is collateral protection insurance?
Collateral protection insurance (CPI) is a type of auto insurance policy your car lender may purchase if you do not maintain the car insurance you are contractually obligated to carry.
Most states require drivers to buy auto liability insurance or to otherwise prove they are capable of paying for any injuries or property damage they may cause. Texas, for example, requires 30/60/25 liability coverage. This means you need to maintain bodily injury liability insurance with at least $30,000 of coverage per person and $60,000 of coverage per accident, as well as $25,000 of coverage for property damage. However, state rules aren’t the only requirements you need to consider. If you have a car loan, your auto lender may require you to maintain collision and comprehensive insurance on your car.
If you don’t meet your state’s insurance requirements, you could face significant legal consequences, including expensive fines, registration suspension and license suspension. If you don’t meet your auto loan requirements, your lender may buy a collateral protection insurance policy and make you pay for it.
Do you need to purchase collateral protection insurance?
Collateral protection insurance is perhaps the only type of personal coverage you don’t want to have. If you’re unwilling or unable to meet your car insurance obligations, your auto lender will purchase collateral protection insurance for you. However, you’ll still need to pay for it, and the lender will typically add this cost to your car loan payments.
This can be bad since collateral protection insurance is often more expensive than regular auto insurance coverage, despite the fact that it typically provides less coverage. Lenders buy the coverage to protect their own interests, not to protect you, so it’s much better to buy your own collision and comprehensive insurance.
Why do auto lenders require insurance?
State law requires liability insurance to protect other drivers with whom you share the road. If you cause a crash and hurt someone or damage someone else’s property, liability insurance allows the other party to receive proper compensation. However, liability insurance does not provide coverage for any property damage that you, the policyholder, may suffer.
This is why collision and comprehensive insurance are so important. Technically, collision and comprehensive insurance are two different coverage types; however, drivers frequently purchase them together.
- Collision insurance provides coverage for damage to your vehicle after a collision with another vehicle or a stationary object. For example, if you fall asleep at the wheel and drive into a tree, collision insurance will help pay for repairs to your vehicle. If you rear-end a driver because you didn’t give yourself enough room on an icy road, your collision insurance will help cover the damage to your vehicle, and your liability insurance will help pay for the damage to the other vehicle.
- Comprehensive insurance provides coverage for a variety of other incidents that could impact your vehicle, ranging from damage caused by animals and hail to theft and vandalism. If someone steals your car or a deer runs out in front of you and you hit it, you can file a claim using your comprehensive insurance.
Collision and comprehensive insurance protect both the lender and the policyholder. For example, consider what would happen if your car was stolen or totaled. You wouldn’t want to keep making payments on a vehicle you could no longer drive, but you would still owe that money to your lender. Normally, an auto lender will repossess a vehicle if the borrower stops making payments, but that’s not an option if the car has been stolen or destroyed. In situations like these, comprehensive and collision insurance helps both the lender and the driver.
Some borrowers also buy gap insurance. Since cars quickly depreciate in value, you may end up owing more than the vehicle is worth. If you total your car or it’s deemed a total loss after an incident, gap insurance can cover the difference between what you receive from your auto insurance payout and what you owe your lender.
Is CPI insurance the same as force-placed mortgage protection insurance?
CPI coverage isn’t exactly the same as force-placed mortgage insurance, but the two serve a similar purpose.
Just as auto lenders require borrowers to maintain auto insurance, mortgage lenders require borrowers to maintain homeowners’ insurance. If you don’t meet this requirement, the lender may buy a force-place insurance policy and add its cost to your mortgage.
This is not ideal for homeowners for two reasons. First, force-placed mortgage insurance is often more expensive than the homeowners’ insurance you could find on your own. Second, force-placed mortgage insurance doesn’t provide homeowners with the same level of protection as a standard home insurance policy. Force-placed insurance protects the mortgage company, not the homeowner, meaning some coverages typically found in a home insurance policy, such as additional living expenses or personal property, are absent.
How to Avoid Paying for Lender-Placed CPI Coverage
Collateral protection insurance is often expensive. Luckily, there are a few things you can do to avoid paying for it:
- Understand your insurance obligations. When you finance your vehicle, you’ll have to complete a lot of paperwork. Some of the paperwork in the loan agreement will include your insurance requirements. Typically, lenders will require you to maintain collision and comprehensive auto insurance for the life of your loan, in addition to the insurance required under state law. Most states require bodily injury and property damage liability insurance, but some have additional requirements.
- Maintain the required auto insurance coverage. Once you obtain car insurance, make sure you keep up with your premium payments to prevent your coverage from lapsing. If you switch insurers, make sure you always have coverage in place. This will help you meet your auto loan requirements as well as the legal requirements in your state.
- Provide your lender with proof of insurance. When you purchase insurance, your insurance broker will typically ask whether you are currently financing the car. Make sure you provide this information. It’s also smart to ensure your lender has proof of insurance, especially if you’ve switched insurance providers. If you receive a notice from your lender asking for proof of insurance, follow up immediately to avoid problems.
Do you need help securing auto insurance? Higginbotham can help you find affordable car insurance that satisfies state laws and lender requirements so you can avoid paying extra for collateral protection insurance. Talk to one of our auto insurance specialists today.
