Collateral protection insurance (CPI)

What is collateral protection insurance (CPI)?

When financing a car or home, you often must keep it insured until the loan is fully paid off. That’s because lenders want to protect their investment in case something happens to the property. If you let your coverage lapse, they won’t leave things to chance, they’ll add collateral protection insurance (CPI), which safeguards their money but doesn’t do much for you. Knowing how CPI works can help you avoid surprise charges and gaps in coverage.

How does CPI work?

When you borrow money to buy a car or home, one of your responsibilities is to keep the collateral insured. If your coverage ends or you forget to send proof to your lender, they can purchase CPI on your behalf and add it to your loan. This often means paying more every month without gaining the protections you would get from your own policy. CPI’s job is to protect the lender, not the borrower.

Why lenders use CPI

From the lender’s perspective, offering loans without some kind of safety net would be risky. If you defaulted on your loan and the asset was uninsured, they could lose thousands. CPI solves this problem by ensuring the collateral is always covered, no matter what you do with your personal insurance. While this is good news for them, it can leave you footing a costly bill with little benefit in return.

What does CPI cover?

CPI coverage is focused entirely on the lender’s financial interest in the property. It usually steps in to repair or replace the asset if it’s damaged, stolen or destroyed. What it does not do is protect you from liability, cover your medical expenses or pay for common extras like rental cars or towing. That’s why even with CPI in place, you’re still exposed to financial risks.

• Physical damage – This means the lender is protected if the financed car or property itself is damaged and needs repair.
• Fire, theft, and other perils – CPI may cover losses if the vehicle or property is stolen, catches fire, or is damaged by certain listed risks.
• Collision or comprehensive coverage – Some CPI policies include these protections, but they are often limited compared to standard insurance.
• Total loss protection – In the event the collateral is completely destroyed, CPI may cover only part of the remaining loan balance rather than replacing the full value.

Does not typically cover: liability, medical payments or extra services like roadside assistance.

CPI coverage limitations

It’s easy to confuse CPI with traditional insurance, but the two serve very different purposes. CPI is not there to protect your family, your finances or your legal responsibilities, it exists to secure the lender’s investment. Even when it covers repairs, it may not cover the full amount, leaving you to pay out-of-pocket. Borrowers often discover too late that CPI is a costly safety net with big holes in it.

How does CPI impact you?

Having CPI attached to your loan can affect you in more ways than one. The most obvious is financial, your payments will go up, your loan balance will grow, and you may even pay interest on the CPI premium. On top of that, CPI rarely meets state minimum insurance requirements, which means you could still be driving uninsured in the eyes of the law. In the worst cases, unpaid CPI can lead to repossession or credit damage.

Your responsibilities as a borrower

The good news is that you have the power to prevent CPI from ever showing up on your loan. All it takes is keeping your required insurance active, providing proof to your lender and making sure they’re listed as a loss payee on your policy. These steps ensure your lender knows you’re protected and gives them no reason to add CPI. Staying proactive saves money, stress and unwanted surprises.

When does CPI take effect?

CPI isn’t usually applied without warning. Lenders often send out notices, giving you a window of time to provide proof of coverage before they act. If you ignore these reminders, though, CPI can kick in once your insurance has lapsed, been canceled or gone unverified. By the time it’s added, your loan balance may already be higher than you expect.

How is CPI cost determined?

CPI is rarely a bargain, and its cost is something most borrowers want to avoid. Lenders base the premium on the value of the property, your risk factors and the provider they choose. Unlike personal insurance, you don’t get to shop around or compare rates, the lender decides and you’re billed. That’s why it’s almost always cheaper and smarter to maintain your own coverage.

How to avoid or remove CPI

If CPI has been placed on your loan, it’s not necessarily permanent. You can remove it by purchasing a policy that meets your lender’s requirements, listing the lender as a loss payee and providing proof of coverage. Once confirmed, the lender will often cancel the CPI and may even refund the unused portion of your premium. Acting quickly means fewer charges and less hassle.

What happens if you don’t pay CPI?

Ignoring CPI payments won’t make them disappear. Instead, the charges will be added to your loan balance, often with interest, making your debt more expensive. If unpaid long enough, your lender could consider your loan in default, leading to repossession or damaging your credit score. The safest approach is to maintain your own insurance, so CPI never becomes an issue.

Collateral protection vs. force-placed insurance

These two terms often get used interchangeably, but they aren’t exactly the same. CPI usually applies to financed cars or personal property, while force-placed insurance is more commonly tied to mortgages and home loans. Both, however, work the same way, they protect the lender, cost more than personal policies and provide far less coverage for you. Recognizing the difference helps you understand what’s at stake.

Examples of when CPI is used

Sometimes examples help illustrate how CPI works in real life. Suppose you forget to renew your car insurance, your lender might quickly add CPI and raise your monthly payment. Or maybe you cancel your homeowners policy without alerting your mortgage company, they could add force-placed insurance to protect themselves. In both cases, the lender stays protected, but you’re left with higher costs and less coverage.

Frequently asked questions

Borrowers often have many questions about CPI, since it feels confusing and unfair when first encountered. The biggest concern tends to be cost, because CPI is consistently more expensive than traditional coverage. Other questions include whether CPI can be refunded or if it affects credit, but the bottom line is simple, it’s always better to keep your own insurance in place.

How much does collateral protection insurance cost?

The cost of CPI varies depending on the lender, the value of the asset and the insurer. On average, monthly costs range between $200 and $300, though some lenders charge as little as $150 or as much as $500 or more. These prices are significantly higher than most personal insurance policies, making CPI the costly option to avoid.

Can I get a refund if CPI is removed?

Yes, in many cases you can receive a refund if CPI is canceled after you provide proof of valid insurance. Lenders often refund the unused portion of the CPI premium, which is credited back to your loan balance. Acting quickly to send proof of coverage not only saves you from future charges but can also put money back in your pocket.

Does CPI affect my credit score?

CPI itself doesn’t appear on your credit report, but failing to pay the added charges can. If the balance pushes your loan into default or leads to repossession, your credit score may take a serious hit. Keeping your personal insurance active is the best way to protect both your finances and your credit history.