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If you buy a car with a car loan, you’ll be required to get car insurance that meets the needs of your lender. After all, the loan is backed by your car—meaning if you fail to pay your loan, your lender can sell the car to recover the loan balance. What happens if you pay your car payments but not your insurance premiums? Your lender will buy collateral protection insurance.
And they will pass on those costs to you. This article will cover everything you need to know about collateral protection insurance, how to get rid of it, and how to avoid paying for it in the future. Plus, we’ll show you how to use car insurance comparison to choose a car with low insurance costs and save money on your policy so you never miss a payment. Let’s get started.
Collateral protection insurance is for lenders when a borrower fails to carry continuous insurance on their car.
CPI policies are more expensive than car insurance you buy yourself because they don’t take into account your driving profile when calculating rates.
The high cost of CPI premiums is passed on to the borrower and is usually charged to the borrower as part of the monthly loan payment.
CPI means 'Collateral Protection Insurance.' It is a type of insurance policy that a lender takes out on a piece of property—your house or car—being used to back (a.k.a. collateralize) a loan.
Collateral protection insurance, or CPI, is an insurance policy that a lender takes out to insure a vehicle it has written a loan for if they suspect the vehicle is not currently insured. When you take out a car loan, you use your vehicle as collateral for the loan. If you fail to make your car payments, your lender can repossess the car to recover the debt owed on the car loan.
So it’s in your lender’s best interest to ensure that your car has adequate auto insurance for the life of the loan. When you get your loan, your financial institution will lay out what types of car insurance coverage you need to carry in the loan agreement. If you can’t prove your car is covered at all or covered correctly, your lender will buy a CPI policy and charge you for it.
That CPI policy will be more expensive than what you’d pay just by buying a policy yourself. You may also be charged additional fees by your lender. Other names for CPI coverage include:
A CPI policy is similar to full-coverage car insurance. It includes collision coverage and comprehensive coverage—both of which protect the vehicle. These policies may cover liability insurance, uninsured and underinsured motorist protection, and even medical payment coverage. But not always.
The main thing to remember is that it’s meant to protect your lender’s interest above all else. And, because costs are passed on to you as the borrower, cost matters to your lender much less than other needs.
How does collateral protection insurance work?
A CPI policy may be issued if your lender believes your car is not properly insured. When this happens, your lender will purchase a policy from a CPI provider. You’ll receive a notice from your lender. You’ll also receive a charge for premiums (plus fees) as part of your monthly car payment.
If you cause physical damage to your car and the only insurance policy you have is CPI, your car should be covered for repair costs—minus the deductible, which your lender will charge back to you. Your injuries and the injuries of others may not be covered by CPI because it often doesn’t include liability coverage. Meaning you would have to cover those costs out of pocket.
How does my lender know if I’m carrying adequate car insurance?
When you buy car insurance on a financed vehicle, your car insurance company participates in insurance tracking. Your insurer sends notifications to your lending institution any time your policy is renewed, canceled, or expired.
How much does collateral protection insurance cost?
CPI policies are generally more expensive than a policy you buy on your own. Most policies will cost between $200 and $300 per month, but in some cities, you could pay more than $500 in monthly premiums. The exact cost of a CPI policy will depend on a few factors, mainly:
Lender fees: How much your lender charges to purchase collateral protection insurance for you can include processing, administrative fees, or a penalty for not carrying continuous insurance.
Your location: Car insurance is more expensive in areas with traffic congestion, high claim rates, and high crime rates. If you live in one of these areas, CPI will also be more expensive.
The vehicle: The make and model of your car play a big role in the cost to insure it. Not only the car’s value but other factors are important as well, like the frequency at which your car’s model is stolen.
How is collateral protection insurance calculated?
Essentially, CPI policies are issued without underwriting. That means that specifics relating to your personal profile, driving record, and driving habits are not taken into account when calculating your costs. When this happens, insurance companies simply default to charging what they would charge high-risk drivers, maybe even more.
When risks are unknown, the insurance company needs to ensure it’s covering its own interests. To stay solvent, insurance providers charge the people most likely to make a claim more money than people less likely to make a claim. A claim equals a loss to the insurance company. The more they avoid paying out for a loss, the more profitable the company will be.
Luckily, it’s pretty easy to rid yourself of the high cost of CPI. All you need to do is get an insurance policy and have your insurer notify your lienholder that you have a policy in good standing. Once your lender receives official notice from your car insurance company, it will cancel the CPI policy and stop charging you for premiums.
Depending on its procedure, it may take a few days or weeks for your lender to process the request. Be sure to ask your lender about the process to ensure you do everything needed to get your paperwork completed. Afterward, follow up by checking that your payments are made on time.
If you’re having trouble keeping up with your car payments, consider downsizing to a less expensive vehicle. Non-continuous coverage can make car insurance more expensive for you in the future. And car repossession can land you in trouble with creditors and your credit score.
How do I save money on collateral protection insurance?
You save money by getting car insurance yourself and staying properly insured. With most policies on financed vehicles, your insurance company must notify your lender when your policy is expired, renewed, or canceled. You will also receive these notifications in advance. The best thing you can do is to keep your auto insurance policy current.
That doesn’t mean you have to stick with the same policy for the life of your car loan. It is still possible to switch insurance to a better provider when you want to. You just need to ensure that your new policy is in effect when your old policy expires. Your new car insurance company should send proof of insurance to your lender.
But don’t leave things to chance. Send along your policy documents as soon as you receive them. And don’t be afraid to contact your lender to ensure you follow their protocols.
How to Get Cheap Car Insurance for a Financed Vehicle
We recommend comparing car insurance costs for different car models before you buy. This will give you a clear picture for all the carrying costs of car ownership. Popular vehicles with safety features and a low theft rate tend to have lower costs for full-coverage car insurance. Once you find the right car, compare your rates and purchase your insurance policy before leaving the lot.
Our free car insurance quote comparison tool makes things easier. Fill out our confidential form to shop for car insurance anonymously. Adjust coverage options and read company overviews without sharing your information everywhere. Choose a policy and buy it in just a few minutes. Still have questions? We have independent insurance agents available to help.
Frequently Asked Questions
Why is collateral protection insurance so expensive?
CPI policies cost a ton of money for one main reason: the insurance company has gathered no information about you, the driver. Without your driving record, credit history, and personal info, the insurer cannot properly assess your risk nor offer a discount. Thus, the insurer charges a high rate. Buying regular full-coverage car insurance is usually much cheaper than CPI.
Can you get rid of CPI insurance?
Luckily, it’s easy to get rid of your CPI policy. All you need to do is get a policy that meets the insurance requirements of your lender or lessor. Once your policy is purchased, you can send proof of insurance—an insurance card or declarations page should be enough—to your lender or lessor. They will then cancel your collateral protection insurance.
What is a notice of collateral protection insurance?
A CPI policy insures property that is being used as collateral for a loan. When you buy a car with a loan, the car is collateralized property. If you fail to keep a current insurance policy, your lender will force its own coverage and charge you for the cost. A notice of collateral protection insurance is the written notification that your lender has forced such a policy.
How do I know if I have collateral protection insurance?
There are two telltale signs that you have a CPI policy. The first is that you received a notice of collateral protection insurance. Usually, this is a physical document sent through the mail. The second sign is that your lender has charged you a much higher fee. The fee should be marked as your CPI premium. If you’re unsure whether you have a CPI policy, speak with your lender.
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Data scientists at Insurify analyzed more than 40 million real-time auto insurance rates from our partner providers across the United States to compile the car insurance quotes, statistics, and data visualizations displayed on this page. The car insurance data includes coverage analysis and details on drivers' vehicles, driving records, and demographic information. Quotes for Allstate, Farmers, GEICO, State Farm, and USAA are estimates based on Quadrant Information Service's database of auto insurance rates. With these insights, Insurify is able to offer drivers insight into how companies price their car insurance premiums.
J.J. Starr is a health and finance writer with a background in banking, lending, and financial advising. She holds a Series 6, FINRA, and life insurance licensure and a master's degree from New York University. Through her writing, she strives to use her decade of experience to help consumers make sound financial choices. Connect with J.J. on LinkedIn.