Everything you need to know about CPI and car insurance
Let’s say you get an auto loan to pay for your new vehicle. Auto loans come with insurance requirements that typically are more than your state’s required coverage. Usually, it includes collision, comprehensive, and gap coverage, which will pay for the remainder of your loan if your vehicle is totaled.
But what happens if you don’t have the insurance your auto loan lender mandates? That’s where collateral protection insurance comes in.
Collateral protection insurance, or CPI, is a type of insurance that protects the auto loan lender in case the borrower (i.e., you) lack the required insurance at the time their vehicle experiences physical damage.
Collateral insurance covers the amount of your car loan and any interest you’ve accrued.
CPI shifts the financial responsibility for paying the rest of the loan to the borrower, ensuring the lender that they will get their money back. In other words, it’s financial protection for the car loan provider in case the borrower says they purchased insurance — but actually didn’t — or has lapses in coverage.
Typically, CPI is enacted when a borrower fails to provide proof of auto insurance coverage, including collision and comprehensive coverage and gap insurance. These coverages cover the borrower’s property damages, whether from collisions or weather conditions, theft, vandalism, etc. If the borrower doesn’t have collision or comprehensive coverage and their car is totaled, they may still owe an amount on their loan, which gap insurance would then cover. If they don’t have gap insurance, the lender would enact CPI to make sure they can recoup the loaned amount.
If you purchase the minimum coverage your lender requires, CPI won’t affect you at all. However, if you fail to provide proof of insurance, such as an insurance ID or declarations page, your lender may enact CPI. This means you’ll be responsible for the cost of any property damages, not your loan provider.
If CPI isn’t in place, it means you provided the necessary proof of insurance via your insurance ID or policy declarations page. Then, if you total your car, your gap insurance will cover the remaining account on the loan, removing the need for the lender to protect itself with CPI.
If CPI hasn’t been enacted and you still owe money on your loan and have no insurance, your lender may repossess your car, and the repossession will show up on your credit report. Having a bad credit score makes car insurance more expensive and means you’ll have higher interest rates on your auto loans.
Having a bad credit score affects your car insurance premiums in every state except California, Massachusetts, Hawaii, and Michigan.
Once you show proof of insurance, your auto loan lender will refund you for the cost of the CPI. Find out more about the costs below.
CPI costs anywhere from $200 to $500 a month or $2,400 to $6,000 a year. That’s much more expensive than the average cost of auto insurance, meaning it’s cheaper to have the required coverage and avoid CPI altogether.
The cost of CPI depends on your state and lender, as well as your driver risk level. Higher-risk borrowers have higher CPI premiums.2
You won’t get to choose the type of coverage on your CPI. Your lender will decide that for you.
CPI/lender-placed insurance is legal. It’s part of the auto loan agreement you signed initially.
Collateral protection and force-placed insurance are two terms for the same concept, along with creditor-placed insurance.3
Hopefully, you won’t have to use CPI insurance as you’ll already have the coverage your auto lender requires. Since CPI costs more than auto insurance, the best bet for your budget is to maintain the coverage required. That way, you won’t be responsible for having to pay the remainder of your auto loan out of pocket.
Best Collateral Protection Insurance & Vendor Single Interest (CPI/VSI) Providers (2023) Green Profit Solutions, Inc. (2023, Jan 3).
What is Collateral Protection Insurance? Capital One. (2022, May 20).
Property & Casualty Market Conduct Annual Statement. National Association of Insurance Commisssioners. (2021).