When an individual takes out a loan for a vehicle, they’re typically expected to also purchase and maintain full-coverage auto insurance for that vehicle throughout the entirety of the loan period. During the loan, the bank or lender technically owns the vehicle, so they have coverage requirements to ensure the vehicle is properly covered by car insurance.

If an individual didn’t have proper car insurance and the car was damaged, this would result in a loss for the lender. To protect themselves from losses, lenders insist that certain car insurance is taken at the time of the loan and maintained during the loan. If the borrower fails to buy a proper auto insurance policy and cannot provide proof of insurance, the auto lender must protect itself against vulnerabilities to loss. That’s when collateral protection insurance comes into play.

What is collateral protection insurance?

Simply put, collateral protection insurance is coverage enacted by the auto lender to protect the vehicle if the borrower doesn’t have sufficient coverage on the vehicle. Because it’s insurance purchased by the lender, it’s also known as lender-placed insurance.

How does collateral protection insurance work?

In the event the borrower doesn’t purchase the agreed-upon auto insurance coverage, the lender would then contact a collateral protection insurance company and purchase a CPI policy.

There are a variety of structures for the lender to choose from, including policies that protect only the loaner and those that protect the loaner and, to some extent, the borrower as well (dual-interest insurance policy). Whatever policy the lender buys, they then incur insurance costs, which are expensive.

To pay off the cost of insurance, the auto lender adds a premium to the original principal that the borrower must repay, and increases the monthly payments/installments on the loan.

Collateral protection insurance is valid until the borrower repays the entire auto loan or until the borrower purchases valid car insurance that meets the loan agreement. If the borrower buys valid auto insurance coverage at a later date, the lender then subtracts the premium from the principal amount. However, if your insurance lapses again at a later date, the premium is once again imposed.

What does collateral protection insurance cover?

Collateral protection insurance or lender-placed insurance usually covers physical damage to the vehicle. Collateral protection insurance coverage falls under two categories: collision coverage and comprehensive coverage.

Collision coverage provides protection for damage to the vehicle caused by collision with a fixed object, such as another vehicle or a wall is covered. Comprehensive coverage includes coverage for damage caused by animals, vandalism, weather-related damages, and even theft.

How to Avoid Having Collateral Protection Insurance Imposed by Your Lender

While car insurance policies can be expensive, you won’t ultimately save money by forgoing the coverage needed to satisfy your auto loan. Collateral protection insurance imposed by your lender will be very expensive.

To avoid having collateral protection insurance, you should ensure you have all the proper car insurance coverage needed to satisfy your loan, which typically means purchasing collision and comprehensive coverage.

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