What is Collateral Protection Insurance and How it Works

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.

What is CPI?

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: 

Auto loans

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. 

Home loans

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 secured loans

Other types of secured loans, such as loans for recreational vehicles, boats, or equipment, may also have insurance requirements.

High-risk borrowers

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.

What is collateral on a loan?

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:

  1. Loan application. When you apply for a loan, the lender will evaluate your creditworthiness to determine if you’re eligible and what terms will be offered.
  2. Collateral requirement. Depending on the type of loan and the lender’s policies, you may be required to provide collateral as part of the loan agreement.
  3. Collateral assessment. The lender will assess the value of your collateral to determine its worth and whether it is sufficient to cover the loan amount.
  4. Loan approval. Once your loan application is approved and the collateral is agreed upon, you’ll receive your loan and begin making monthly loan payments.
  5. Default and collateral seizure. If you fail to make the required payments or default on your loan, the lender can seize or take ownership of the collateral to recover their losses.

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.

How does CPI work?

Here’s how collateral protection insurance works:

  1. When you take out a loan to finance an asset like a car or a home, the lender may require you to maintain specific insurance coverage on the asset you’re using as collateral.
  2. The lender will require you to provide proof of insurance to approve your loan and at certain intervals over the life of the loan. An insurance card is not adequate proof of insurance. You’ll need to provide an insurance declaration page that shows you have the required coverage (as outlined below).
  3. If your coverage lapses (expires) or becomes insufficient, the lender may place CPI on your loan. The CPI policy acts as a safety net for the lender, reimbursing them for losses they may incur due to the lack of adequate insurance coverage.
  4. The lender pays the premiums for the CPI insurance policy. These costs are passed on to you through increased loan payments. At Marine Credit Union, the cost of the coverage will be added to your loan over 10 months. Be aware that these costs can cause your monthly payment to increase significantly.

How to avoid CPI

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:

  1. The collateral secured by the loan must be listed on the policy. For example, your insurance policy must list your vehicle’s make and model.
  2. You must have full coverage in place. “Full coverage” is defined as comprehensive and collision coverage:

    • Comprehensive coverage pays for repairs associated with non-collision events, such as theft, fire, and weather-related incidents.
    • Collision coverage pays for repairs associated with damage sustained in a collision, such as striking another car, a tree, or a guardrail.

  3. The deductible must not exceed $1,000.00.
  4. Marine Credit Union must be listed as the lienholder or loss payee on your insurance policy. List the address:

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.