If your monthly loan payment on your car insurance has gone up, it may be because collateral insurance was added onto your monthly payment. But what is collateral insurance?
Essentially, it is the type of insurance you will end up with when you finance a new car, in the event you were unable to secure your own car insurance policy. You typically do not have the ability to choose it; your lender does. If you failed to provide proof of coverage, your lender may purchase collateral car insurance on your behalf, and the extra costs are then added to your monthly car payments.
How does collateral insurance work?
Collateral protection insurance (CPI) is car insurance that protects your car against physical damage. It is chosen by your lender and added onto your loan payments when you fail to insure (or properly insure) your car yourself.
When you finance a new car purchase, your lender has certain requirements you must meet, such as making monthly payments and purchasing the proper amount of car insurance. Because the vehicle technically belongs to the lender, they have a vested interest in having it financially protected. This means if it is damaged in an accident and you have no way to pay for its repairs, both you and the lender are financially impacted by the loss.
The primary downside to a CPI premium is that it is typically non-negotiable. If you secure your own policy, you can typically get lower rates if you shop around and compare providers. In addition, the amount of coverage you get with a lender-selected policy will be limited to the amount stipulated in your loan agreement. To select the coverages and limits that suit your insurance needs, you would need to set up your own policy.
What does collateral insurance cover?
Collateral insurance is intended to cover any physical damage done to your car, which means, at bare minimum, it typically comes with collision and comprehensive coverage (though it may come with medical expenses and liability as well, depending on the package your lender purchases on your behalf). Most policies with collateral protection insurance protect against things such as:
- Theft — Should someone steal items belonging to your car (such as its radio), comprehensive coverage pays for any costs associated with repair or replacement. Also covers damages your car sustains from someone breaking into it. Note: items that are stolen from your car (such as your wallet, purse, or phone), are typically not protected under this type of coverage.
- Vandalism — If your car is vandalised by criminals, comprehensive coverage would cover its repair or replacement costs, up to policy limits. Smashed windows, slashed tires, broken side mirrors are all examples of events covered by comprehensive coverage.
- Fires — A fire can devastate your car’s appearance and functionality. Comprehensive coverage provides financial protection for both, up to policy limits.
- Falling objects — although it is unlikely your car will be damaged by anything other than a falling tree or tree limb, stranger things can happen. Comprehensive protects you against anything that falls onto your car, which can include anything from lamp posts, AC units or other objects that may descend upon your vehicle.
- Animals (such as striking a deer) — If a rodent, such as a mouse or rat, chews on your car’s wiring, comprehensive coverage will pay for your car’s repairs. Comprehensive coverage even covers damage to your car if you hit a deer.
- Weather events — Hail, lightning and flood water damage are covered under comprehensive coverage. However, if your car is damaged by water from a leaky pipe or roof (in your garage, for example), those types of damage are not covered.
- Collision with another vehicle — Typically the coverage most people need, collision coverage pays for any damages your car encounters while moving, whether it is your fault or not. It does not cover any damages to the other person’s car.
- Collision with a fixed object (such as a sign, fence, parked car) — If you back into a parked car, or run over a sign, your collision coverage would cover for the damage. It will not, however, pay for the repairs of the object you hit. For that, you would need liability insurance.
Collateral protection vs force-placed insurance
Forced-placed insurance is more or less synonymous with collateral protection because both do the same thing and are implemented at the same time. The main difference between the two is that you can have force-placed auto insurance or force-placed home insurance, but collateral protection can only be added to your car. Therefore, think of collateral protection as a type of force-placed insurance but is only for automobiles.
Collateral protection refunds
On rare occasions, lenders make mistakes and may require borrowers to purchase CPI when it was not needed. If you were unnecessarily required to purchase CPI, there are ways to reverse the situation. In most cases, the situation can be resolved by providing either a copy of your proof of insurance or your policy’s declarations page to your lender. If neither of these suffice, you may need to connect your lender with an agent from your insurance company. Once your lender receives the appropriate paperwork, the CPI payments should stop.
You may have been charged CPI for any days you were not properly insured, even if you eventually established your own policy and no longer need lender-selected collateral protection. If this is the case, you will likely not be refunded for any CPI added onto your loan payment for the period in which you did not have your own policy in place. You are technically ‘back-paying’ for insurance in this scenario. Whatever your situation, be sure to communicate with your lender if and when your own policy is in place to avoid any unnecessary additional costs.
Frequently Asked Questions
Do I need CPI?
You do not need collateral protection insurance if you purchase the required amount of coverage prior to the date stated in your loan agreement. If you have not, your lender may establish CPI on your behalf and add the cost to your monthly car payment.
How do I avoid CPI?
You can avoid CPI by being properly insured prior to leaving the dealership (and by avoiding lapses in coverage thereafter).
If you have the required coverages and such in your policy, you will need to provide documentation to your lender proving compliance. Insurance cards show insured dates (both start and end of term), as should a declaration page.
What is the best insurance to avoid CPI?
There are many great car insurance companies on the market, each with its own unique coverage and discount offerings and algorithm for calculating rates. Depending on the situation and coverage needs, along with preferred level of customer service, the best car insurance companies can vary by individual driver. Provided you are able to compare rates and coverage options in advance, it is generally preferred to get your own policy from any provider to avoid having to be covered by collateral protection insurance.