What Is Collateral Protection Insurance? (2024)

Lenders take out collateral protection insurance when a borrower can’t meet the required auto insurance on their financed vehicle.

Nick Dauk
Written byNick Dauk
Nick Dauk
Nick Dauk
  • 6+ years writing about insurance, travel, and personal finances

  • Contributor to brands like Credible

In addition to insurance, Nick specializes in writing about business, entrepreneurship, personal finance, and travel. He’s been featured in myriad web publications, including Fox Business.

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Katie Powers
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Katie PowersAuto and Life Insurance Editor
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  • 3+ years experience in insurance and personal finance editing

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Konstantin Halachev
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Konstantin HalachevVice President of Engineering
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  • Ph.D. in Computational Biology

Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.

Updated February 9, 2024 at 11:00 AM PST

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If you finance or lease a vehicle, your lender or leasing company will require you to carry a certain amount of car insurance — usually at least your state’s minimum liability coverage and comprehensive and collision coverages. If you don’t meet that requirement, the lender or leasing company can purchase collateral protection insurance, or CPI, for your vehicle and require you to pay for it.

CPI is often more expensive than traditional car insurance policies because the lender needs to secure the insurance and won’t spend the same amount of time comparing quotes to find a good deal. The cost ultimately depends on your lender and the state you live in, but the average cost of CPI ranges from $200 to $300 per month.

Here’s what you need to know about collateral protection insurance and how you can avoid paying for this expensive type of insurance.

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What is collateral protection insurance?

Collateral protection insurance is an insurance policy designed to protect a financed or leased vehicle for as long as a lender has a financial interest in the vehicle. If you’re taking out an auto loan from a bank or credit union, you’ll need to insure it according to the loan agreement’s requirements.[1]

If you lack the required insurance or have a coverage lapse, your lender will purchase a CPI policy, which people may also refer to as force-placed or creditor-placed insurance. These policies can be expensive, but you can easily have the policy removed after you purchase the correct coverage level.

How does CPI auto insurance work?

When you take out an auto loan, your lender still owns the car. If you don’t repay your loan, the vehicle is collateral that will go to the lender.

Your loan agreement requires you to insure the vehicle according to the lender’s coverage standards. If you don’t maintain the required coverage, the vehicle is uninsured collateral that puts the lender at risk.

If necessary, the auto lender will add a collateral protection insurance policy to the loan and pass the insurance premium costs onto you. 

Good to Know

It’s legal for a creditor to purchase a CPI policy and immediately begin charging the borrower monthly payments to repay the cost of the coverage, according to the National Credit Union Administration (NCUA). Ultimately, CPI both protects and benefits the lender, as it can collect higher interest on the loan.[2]

What does collateral insurance cover?

Collateral protection insurance isn’t a substitution for traditional car insurance, though it does provide an element of financial protection on the vehicle. The policy typically covers damages to your vehicle in the event of an accident or theft, similar to how collision and comprehensive coverage work.

CPI protects the value of the vehicle for the lender’s benefit; it rarely will include liability insurance. This means if you cause an accident that totals your car, your CPI will pay the lender for its losses, but it won’t cover any liability you have for damages or injuries to the other driver.

Important Information

Every state except New Hampshire requires drivers to have at least a minimum amount of liability insurance. Driving without car insurance can expose you to serious legal and financial consequences.

Collateral protection vs. force-placed insurance

It’s common to see collateral protection insurance used interchangeably with force-placed insurance, lender-placed insurance, and credit-placed insurance.[3] Typically, you’ll see the term “collateral protection insurance” used only when it pertains to vehicles, whereas you’ll see force-placed insurance and similar terms used for other types of collateral, like real estate.

Yes, collateral protection insurance is legal. Your vehicle lender can purchase a CPI policy for your vehicle and require you to assume responsibility for the premium payments. If you don’t pay for your CPI policy premiums, the lender can legally repossess your vehicle because you didn’t meet the agreed-upon CPI requirements.

It’s typically cheaper for you to purchase the coverage your vehicle lender requires instead of only purchasing liability coverage and taking on the payments from a lender-purchased CPI policy.

How much does collateral protection insurance cost?

The cost of collateral protection insurance depends on a number of factors, including your lender, the state you live in, and the number of times a lender has taken out CPI on a vehicle you’re borrowing. Some companies may set the cost of this insurance closer to $150 per month, while others may charge as high as $500 per month or more. Costs typically range between $200 and $300.

When your lender shops for a CPI policy, the rate will depend on market trends, location, and how much interest they charge you. Lenders won’t necessarily shop around for the cheapest policy they can find.

In most cases, your lender will automatically include the CPI premiums in your monthly loan payment, including any past payments required if you’ve been uninsured for longer than a month. CPI doesn’t include medical expenses or uninsured motorist liability coverage, so you’ll likely save money by purchasing the required coverage on your own insurance policy.

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How do you remove collateral protection insurance?

All information about your CPI will come through lender communication. You can always inquire about a notice, coverage specifics, and more related to the CPI they issued. If you had a lapse in coverage or don’t have the correct amount of coverage, your lender will issue CPI to the borrowed vehicle.

If your lender made a mistake or you acquired coverage after the notice, it’s relatively easy to remove collateral protection insurance from your vehicle. Take the following steps to remove CPI:

  1. Verify with your insurance company that you have a valid insurance policy that includes the coverages required by your auto lender.

  2. Contact your lender and send them proof of insurance, including any statements detailing how long your policy has been active.

  3. Provide your lender with any other insurance policy information they need.

  4. You should receive a notice that your lender has removed the CPI a few days after you verified your insurance policy. If you don’t, reach out to your lender.

Collateral protection insurance FAQs

Before you take out an auto loan through a bank or credit union, make sure you understand their coverage requirements. The following information clarifies important details about a borrower’s financial responsibility and collateral protection insurance.

  • Is CPI the same as gap insurance?

    No, collateral protection insurance protects the lender of the purchased or leased vehicle. Gap insurance is for the borrower or leaseholder. It covers the difference remaining when the owed value exceeds the market value after a total loss.

  • Why is CPI expensive?

    CPI is expensive because the financial institution holding the auto loan isn’t comparing prices or using your personal data to find the lowest rate available. Your lender simply wants to purchase a policy that protects its property for the life of the loan.

  • What types of collateral does CPI typically cover?

    A CPI policy primarily covers physical damages the car could sustain to protect the lender’s loan collateral. CPI typically includes comprehensive and collision insurance on automobiles, but it can also apply to homes and other secured loans.

  • What determines the cost of CPI?

    Lenders select the CPI policy and coverage limits, which ultimately determines the cost of CPI. The rate of coverage may vary by the state you live in and industry trends, but consumers should anticipate higher-than-average rates compared to insurance quotes they would receive in an independent search.

Sources

  1. Global Credit Union. "Collateral Protection Insurance (CPI)." Accessed January 23, 2024
  2. National Credit Union Administration. "Collateral Protection Insurance." Accessed January 23, 2024
  3. New York State Department of Financial Services. "Force-Placed Insurance: What You Need to Know." Accessed January 23, 2024
Nick Dauk
Nick Dauk

Nick Dauk is a freelance writer specializing in business, entrepreneurship, personal finance, and travel. His work has been featured in Fox Business, BBC, The Edge, Business Insider, and Bisnow. Nick is a first-generation college graduate, having majored in Interdisciplinary Studies at the University of Central Florida. His eclectic coursework, combined with previous managerial roles in the retail and broadcast television industries, have helped him develop an interdisciplinary approach to writing.

For nearly a decade, Nick has created content for mom-and-pop businesses and global corporations. As a travel writer, his global adventures have also been featured on Inside Hook, Houston Chronicle, Culture Trip, and Matador. When he's not traveling, Nick can be found in Orlando spending time with his wife and toddler.

Katie Powers
Edited byKatie PowersAuto and Life Insurance Editor
Photo of an Insurify author
Katie PowersAuto and Life Insurance Editor
  • Licensed auto and home insurance agent

  • 3+ years experience in insurance and personal finance editing

Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.

Featured in

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Konstantin Halachev
Data reviewed byKonstantin HalachevVice President of Engineering
Headshot of Konstantin Halachev, VP of Engineering at Insurify
Konstantin HalachevVice President of Engineering
  • 7+ years experience in data analysis

  • Ph.D. in Computational Biology

Konstantin has led data teams across multiple industries, including insurance, travel, and biology. He’s led Insurify’s engineering team for more than three years.

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