Drivers have to consider many factors when taking out a loan for a new car. 

Between choosing the make, model, and price point, buying a new car can be stressful enough before even thinking about auto insurance. Unfortunately, insurance is a necessary purchase for every motorist. But if the borrower doesn’t supply car insurance, the bank or lender can enforce its own.

A lender can force drivers who don’t buy an insurance plan to pay for collateral protection insurance (CPI), also known as forced car insurance or lender-placed insurance. CPI is part of a loan agreement when a vehicle that is still owned by the bank or auto lender is not insured at the loan’s start. Unfortunately, CPI is also usually more expensive compared to regular car insurance. 

Motorists looking to lower their premiums should look into buying an actual auto insurance policy for their vehicles. Luckily, Insurify makes the process of finding the perfect insurance much more simple than finding the perfect car. You’ll be able to compare car insurance quotes from multiple companies at once and find affordable coverage that best meets your needs.

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What is collateral protection insurance

When a motorist chooses to take out a loan from a bank or auto lender, the loan usually comes with insurance requirements

Since the bank or lender still owns the vehicle, making them a lienholder, they require insurance coverage in case of physical damage. It is also necessary because most states require drivers to have some form of car insurance. Usually, the loan agreement states that the motorist must provide insurance. Otherwise, the bank or lender will enact a lender-placed policy.

Collateral protection insurance is the insurance provided by the auto lender or bank. It is enforced when the borrower doesn’t supply enough coverage themselves. Unlike standard auto insurance, the lender owns the policy, but the borrower pays for it. Using insurance tracking programs, lenders make sure the motorist has sufficient insurance through the life of the loan. And if the tracking company realizes the vehicle has lost coverage, the lender will enforce CPI.

Insurance payments are separate from auto loan payments. The borrower must make payments on time, or the lender can legally repossess the vehicle. Repossessions will negatively impact a credit score. That may raise the cost of insurance services in the future. However, buying a policy can replace the CPI policy at any time.

How much does collateral protection insurance cost?

If the auto loan borrower fails to purchase their insurance from an independent company, they have to pay for CPI insurance. Usually, CPI premiums cost significantly more than standard car insurance. The premium cost is still directly related to the remaining loan balance, which means it might cost less per month, depending on the loan’s payments. The premium is also affected by specific state laws regarding collision and liability coverage, so borrowers in particular states may end up paying less.

Borrowers may also end up having to pay any retroactive fees from not appropriately insuring the vehicle. That means they would have to make back payments for any days that they did not have proof of insurance. That includes any time between the start of the lease and the official start of the insurance policy. The lender may also issue a refund if they charge incorrectly for forced insurance and the borrower presents proof from an insurance company.

Fortunately, if a borrower requires insurance, the CPI provider cannot add any unnecessary coverage. That means the financial institution that owns the vehicle can not make the borrower pay for extra coverage or change the deductible

Find Affordable Car Insurance in Minutes 

The process of buying a car can be very stressful, and tacking on an expensive CPI program can only make it more difficult. Since all motorists in the United States should have car insurance, finding the best collision coverage can mean a world of difference. Regardless of your insurance history, it’s essential to compare auto insurance quotes to guarantee the best deal. Instead of settling for your lending institution’s price, visit Insurify to compare prices from multiple companies all at once. 

FAQ: Collateral Protection Insurance

Do I need collateral protection insurance?

Unfortunately, if you do not purchase an auto insurance policy, the bank or lender will force you to pay for collateral protection insurance. Having insurance coverage is a requirement in most lender contracts. Every state requires motorists to have some level of insurance in case of damage and liability. When a borrower doesn’t purchase an independent insurance plan or make payments toward CPI, the lender has the legal right to repossess the vehicle.

What does CPI cover?

CPI typically covers any physical damage to the vehicle. That includes damage from hitting certain structures like walls, railings, cars, curbs, and posts. It usually also includes comprehensive coverage. That protects against animals, theft, and weather-related damage.

How can I avoid paying for CPI?

Since CPI is typically more expensive than regular car insurance, motorists would save money by avoiding it altogether. By purchasing a car insurance policy before the beginning of the auto loan, the borrower would not have to pay for CPI at all. Typical car insurance can also offer significantly more coverage and benefits. If you need a quick and easy way to compare quotes online, head over to Insurify. We make it easy to find great car insurance for the best price.

Updated October 16, 2020

Samantha Vargas is a freelance writer for Insurify. She has a background in comparative English literature and film and has produced a variety of journalistic content for the University at Buffalo's independent student newspaper, The Spectrum. She currently works in Buffalo, NY while finishing her master's degree. She spends her free time baking and working with animal welfare groups.