For lenders, the term “collateral damage” is more than just a saying (or an Arnold Schwarzenegger movie). Financial institutions take collateral seriously. So seriously that it has its own insurance.
Collateral Protection Insurance, or CPI for short, is a type of insurance coverage that lenders purchase to protect themselves against potential losses. CPI is typically used when a borrower is required to maintain insurance on the financed asset as a condition of the loan agreement.
Here are some common scenarios in which having inadequate insurance coverage may invoke (activate) CPI:
When you get an auto loan, the lender may require you to maintain comprehensive and collision insurance coverage on the vehicle. If you fail to maintain or let this coverage lapse, the lender may place CPI on your loan.
If you have a mortgage, the lender may require you to maintain homeowners’ insurance to cover potential damages or losses to the property. If your coverage lapses or becomes inadequate, the lender may place CPI on your loan.
Other types of secured loans, such as loans for recreational vehicles, boats, or equipment, may also have insurance requirements.
If you have a history of not maintaining insurance coverage or your creditworthiness indicates higher risk, your lender may require CPI as an added layer of protection.
Before we dive into collateral protection insurance and how it works, let’s define collateral.
Collateral is an asset that you pledge to a lender as security for a loan. Some lenders require collateral to be “put up” for a loan because it mitigates their losses in case you default on your loan.
Let’s say you’re using your vehicle to secure your loan. This means you’re pledging an asset of value (your car) as a security or guarantee to the lender. If you fail to repay your loan according to the agreed-upon terms, the lender could claim ownership of your vehicle.
Here’s how collateral on a loan works:
At Marine Credit Union, when you secure your loan with a vehicle, you’re required to have specific insurance coverage. If your coverage does not meet the requirements, then collateral protection insurance (CPI) is placed on your loan.
Here’s how collateral protection insurance works:
The circumstances in which CPI is required vary by lender, type of loan, and local regulations. If you have a loan with Marine Credit Union, CPI is required if you use your car as collateral for a loan and you do not have the appropriate insurance coverage.
You can avoid having CPI placed on your loan with the right coverage. Here are the specific things Marine Credit Union requires that you have in place with your insurance company:
Marine Credit Union
PO Box 3390
Carmel, IN 46082
It’s important to note that CPI is not legal insurance. The insurance purchased by your lender does not meet the insurance required by law for operating a motor vehicle. CPI insurance protects your lender’s interest in the loan and does not provide insurance coverage for you as the vehicle owner. So, even if CPI is placed on your loan, you will need to obtain your own coverage to meet the legal requirements.
Remember that the CPI requirements vary by lender. If you’re applying for a loan and planning to use your vehicle as collateral, it’s important to understand your lender’s requirements and carefully review the terms of your loan agreement.