Cpi And Gap Insurance: What's The Difference?

Collateral Protection Insurance (CPI) and Guaranteed Auto Protection (GAP) insurance are not the same. CPI is a type of insurance that protects the lender in case the borrower does not have the required insurance at the time their vehicle experiences physical damage. GAP insurance, on the other hand, reimburses a car owner when the payment for a total loss is less than the outstanding loan or lease balance. It covers the difference between the depreciated value of the car and the loan amount owed if the car is involved in an accident. While both types of insurance are important for car owners, they serve different purposes.

What is CPI?

Collateral Protection Insurance, or CPI, is a type of insurance that is purchased by a lender to protect their investment in the event that the borrower does not have the required amount of insurance coverage. This type of insurance is typically enacted when a borrower fails to provide proof of auto insurance coverage, including collision and comprehensive coverage. CPI covers the amount of the car loan and any interest accrued, and the cost is added to the borrower's monthly payments.

CPI is designed to protect lenders or lessors when a borrower does not purchase an adequate amount of car insurance for the vehicle. It is important to note that CPI is usually more expensive than standard car insurance and may not offer full coverage. The policy is chosen by the lender and added to the borrower's loan payments, covering the value of the car. While CPI policies are similar to comprehensive and collision coverage, they usually do not include liability coverage for the driver. This means that the driver may not be protected against costs if they injure someone or damage their property. Additionally, CPI policies may not meet the minimum insurance requirements of a state, which could result in penalties for the driver.

To avoid paying for CPI, borrowers can obtain a full-coverage auto insurance policy that meets the requirements outlined in their contract. Once proof of sufficient insurance is provided to the lender, they will cancel the CPI policy. It is important for borrowers to maintain open communication with their lender and promptly share any insurance updates to avoid unnecessary additional costs.

What is gap insurance?

Guaranteed Asset Protection (GAP) insurance is an optional form of insurance that covers the difference between the amount owed on an auto loan and the amount paid out by the insurance company in the event of a total loss, i.e., if your car is stolen or written off.

When you buy a new car, it starts to depreciate in value as soon as it leaves the car lot. Most cars lose 20% of their value within the first year. Standard auto insurance policies cover the depreciated value of a car, i.e., the current market value of the vehicle at the time of a claim. GAP insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you still owe on the loan.

For example, if you finance the purchase of a new car and only put down a small deposit, in the early years of the vehicle's ownership, the amount of the loan may exceed the market value of the vehicle itself. If your car is then written off, your standard insurance will only cover the current market value, and GAP insurance will cover the difference between that and the amount you still owe on the loan.

GAP insurance is one of several optional add-on products that a dealer will likely offer when purchasing or leasing a car. The cost of the product will be added to the loan amount. GAP insurance is also available from your auto insurance company or direct lenders. It is important to compare prices and coverage before you buy.

You may also be entitled to a refund if you sell, refinance, or prepay your auto loan.

When is CPI applied?

Collateral Protection Insurance (CPI) is applied when a borrower is unable or unwilling to secure their own full-coverage car insurance policy. In this case, the lender may opt to purchase CPI on their behalf. The borrower is still responsible for the costs, which are added to the monthly car loan payment.

CPI is also applied when there is a lapse in insurance coverage. In this case, the lender may backdate the CPI policy to ensure there is no gap in coverage. The borrower will be responsible for paying the premiums for the lapsed period.

Additionally, CPI can be applied when a borrower fails to meet the insurance requirements outlined in their contract. This includes having comprehensive and collision insurance that covers the value of the car in the event of damage. If the borrower's insurance does not meet these requirements, the lender may purchase a CPI policy to fulfil the insurance requirement.

It's important to note that CPI is typically more expensive than standard car insurance and may not offer full coverage. It also doesn't include liability coverage, so it won't cover costs if the driver injures someone or damages their property. Therefore, it's advisable for borrowers to obtain their own full-coverage insurance policy to avoid the additional costs and limitations of CPI.

How to remove CPI

CPI, or collateral protection insurance, is a type of insurance that lenders purchase to protect their investment in the event that the borrower does not have the necessary insurance coverage. CPI is typically more expensive than standard car insurance and may not offer full coverage. It is important to note that CPI is not always the most economical choice and may not provide tailored coverage as it is chosen by the lender to protect their interests.

Now, let's discuss how to remove CPI:

Understanding the Process of Removing CPI

Firstly, it is important to understand the process of removing CPI. Once you have obtained an auto insurance policy that meets the requirements of your contract, you can proceed to the next steps. Removing CPI is a straightforward process and can be accomplished by providing proof of your new insurance policy to your lender.

Review Your Contract

To begin the process of removing CPI, carefully review your contract to understand the specific insurance requirements outlined by your lender. This information is crucial as it will guide your next steps in obtaining an appropriate auto insurance policy. Take note of the coverage limits, types of insurance, and any other relevant details mentioned in the contract.

Gather Information for an Auto Insurance Quote

After understanding the insurance requirements, gather the necessary information to obtain an auto insurance quote. This typically includes personal information such as your full name, age, address, and driver's license number. Additionally, you will need to provide vehicle information, including the make and model, vehicle identification number (VIN), date of purchase, and mileage. Your driving history, including any tickets, accidents, or license suspensions, will also be required.

Compare Insurance Quotes and Select a Policy

With the information gathered, you can now compare insurance quotes from different providers to find the best rate that meets your lender's requirements. It is important to shop around and explore various options to ensure you are getting the most suitable policy at a competitive rate. Remember, the goal is to find a policy that satisfies your lender's criteria and allows you to remove CPI.

Provide Proof of Insurance to Your Lender

Once you have selected and purchased an appropriate auto insurance policy, the final step is to provide proof of this new policy to your lender. Contact your lender and share the necessary documentation, such as your insurance card or the declaration page of your policy. This proof of insurance will confirm to your lender that you now have the required coverage, and they will cancel the CPI policy.

Maintain Open Communication with Your Lender

Throughout this process, it is essential to maintain open and transparent communication with your lender. Keep them informed about any changes to your insurance policy, as this can help avoid unnecessary additional costs and complications. By proactively sharing updates, you can ensure that CPI is removed in a timely and efficient manner.

In summary, removing CPI involves obtaining an appropriate auto insurance policy, providing proof of this policy to your lender, and maintaining clear communication throughout the process. By following these steps, you can effectively remove CPI and ensure that you have the necessary coverage in place to meet your lender's requirements.

How much does CPI cost?

The cost of CPI insurance is dependent on a few factors. Firstly, it is usually calculated based on the total amount of your car loan. This means that your personal information, credit score, and driving history do not influence the price. This is one of the reasons why CPI insurance is generally more expensive than a standard auto insurance policy.

CPI rates can be calculated in two ways. Either the lender submits the loan information to the state's department of insurance, which sets the rate, or the insurance company used by the lender calculates the monthly premium. Most states have a cap on how much you can be charged for CPI insurance based on the amount of your loan.

If your lender does not find out immediately about your lack of auto insurance, the CPI policy may be backdated so that there are no gaps in coverage. This means you could have to pay for coverage for months that have already passed. For example, if you canceled your insurance policy four months ago and your new CPI policy is $250 a month, you would need to pay $1000 to make up for the four months that you were uninsured.

It is worth noting that CPI insurance tends to be a one-size-fits-all policy, which means it may not always be the most economical choice. The premium is generally non-negotiable, and the scope of coverage is limited to the specifications in your loan agreement.

Frequently asked questions