Collateral Protection Insurance 101

Collateral protection insurance is an insurance policy that protects auto loan lenders from financial losses resulting from having to pay claims when someone does not have auto insurance. Normally, when a borrower gets into a car accident, their auto insurance covers the damages. But when the borrower does not have insurance, the damages are covered out of the value of the car, causing auto loan lenders to lose money. Collateral protection insurance allows lenders to cover the insurance costs without losing any money. In most cases, the insurance is funded using the borrower's insurance payments.

How Collateral Protection Insurance Works

Auto loan lenders buy collateral protection insurance from local collateral protection insurance providers. In the past, lenders have been known for taking commissions from the collateral protection insurance providers based on how many drivers had to pay it. While the practice is not technically illegal, a recent series of high-profile lawsuits, and the resulting bad publicity, convinced many auto loan lenders to drop the practice.

When a borrower takes out a loan to buy a vehicle, the auto loan lender usually requires the borrower to buy auto insurance. In many cases, the auto insurance must specifically include certain types of coverage. Once the borrower got the coverage, they give the lender copies of the insurance document to verify the insurance is valid. The lender then sends those documents to a collateral protection insurance provider or a tracking company.

If the documents are verified, the borrower can continue paying off the auto loan without collateral protect insurance. But if the insurance proves to be invalid or if the borrower does not by auto insurance by the lender's deadline, the lender has a right to impose collateral protection insurance on the borrower. To pay off the insurance costs, the lender increases the borrower's monthly payments by adding a premium to the principle. The coverage ends once the borrower fully repaid their auto loan. If the borrower buys auto insurance and it is verified as valid, the lender will remove the premium and refund the premium payments the borrower made up to that point. If the insurance lapses, the premiums are reimposed right back, so borrowers have to make sure their auto insurance remains current at all times.

What Collateral Protection Insurance Covers

Collateral protection insurance pays for the damages that occur when a borrower gets into a car accident. This includes any physical damage to either vehicle involved, as well as medical expenses and legal costs that result from the accident. The specifics of the coverage vary depending on the state and local laws. In many cases, the collateral protection insurance also offers protection to the borrower. If the car is beyond repair, the insurance pays off any remaining auto loan balance.

Problems With Collateral Protection Insurance

Over the past few years, collateral protection insurance has become infamous as the result of several high-profile lawsuits. In addition to the commission issues, auto loan lenders have been accused of not properly disclosing information to their carriers. In most cases, the premium payments are greater than what the borrower would have to pay if they had auto insurance, something which auto loan lenders often neglected to mention.

blog comments powered by Disqus