Obtaining a car is one of the more exciting ways you can spend your hard-earned money. But along with a car come costs like loan payments, fuel, parking, and insurance. If you’re trying to trim down all these expenses, you may be thinking about not renewing or canceling your car insurance policy.
Think again. Any lender requires that you maintain current car insurance after receiving a car loan. If you don’t have insurance for some reason, they may instate a collateral protection insurance (CPI) policy instead.
What is collateral protection insurance and how does it affect you? Here’s what you need to know.
What Is a CPI Policy?
Car insurance is a requirement when you lease or finance any vehicle. In the event of a loss, your insurance will cover most or all of the associated financial costs.
A CPI policy is a form of forced coverage or lender placed insurance. If your lender discovers that you don’t have car insurance on a vehicle that you’re financing or leasing, they can and will implement a CPI policy themselves to protect the loan’s collateral — in this case, your car. Make no mistake, you’ll be the one paying for the insurance even though the policy will be in the lending institution’s name.
Who Benefits from Collateral Protection Insurance?
Primarily, your lender benefits from CPI coverage. Because the costs are passed along to you, the borrower and car owner, it provides assurance that their collateral is all but guaranteed if something happens while you’re still making payments.
However, it benefits the vehicle owner as well. Although it’s a form of forced car insurance, CPI coverage protects your credit in the event of an unexpected loss.
Is CPI Coverage Mandatory?
Lenders would rather not have to enforce CPI coverage. CPI premiums are typically more expensive than traditional car insurance rates, and collateral protection insurance makes for unhappy customers. Ideally, drivers should carry their own insurance on the vehicle. It’s the most cost effective and straightforward way to insure a car.
Car insurance is mandatory by law in almost every state. If you don’t maintain a current insurance policy, your lender will pursue collateral protection insurance for your car. It’s part of the loan agreement that CPI will come into effect if you don’t insure your car, so there’s no disputing its enforcement.
What Happens if You Don’t Pay for Collateral Protection Insurance?
If you decide you aren’t going to pay the CPI coverage charges for the policy your lender put in place, there will be a severe consequence — just as with non-payment of your car loan, you can have your car repossessed.
A repossession is more than just losing your car. It will be reported to the credit bureaus and stay on your credit report for years. It makes it difficult to not just get a car loan or car insurance in the future, but any credit or financing including a mortgage, a personal loan, or a credit card.
Can I Have CPI Coverage Removed on My Car?
It’s possible to get out of collateral protection insurance offered by a CPI provider. What you’ll need to do to remove the policy is to purchase coverage of your own from an insurance company. Once you add car insurance, provide proof of insurance to your lender so they can cancel the CPI policy.
Rather than take a chance on CPI insurance, find competitive coverage options with Jerry. Regardless of your financial situation or your vehicle, you’ll find the most affordable insurance options.