Collateral Protection Insurance on a Texas Auto Loan

The short answer

Collateral protection insurance (CPI) is coverage your lender buys and charges to you when you don't keep the insurance your auto loan contract requires, or can't prove you have it. Texas regulates it in Chapter 307 of the Finance Code. The lender has to tell you about the requirement when you sign. If it places CPI, it must mail you a notice within 31 days of charging you. And if you show you had the required coverage all along, the lender must cancel the CPI and can't charge you for it. The cheapest way to handle CPI is to never trigger it: know your insurance requirement before you sign, and keep proof on file with the lender.

What counts as collateral protection insurance

Under Finance Code §307.051, CPI is insurance that:

• is bought by the creditor after the credit agreement is signed;
• protects against loss of or damage to the collateral (your car), or against liability from owning or using it; and
• is bought under the contract because the borrower didn't provide proof of insurance or didn't keep it, with the cost, including interest and related charges, payable by the borrower.

A CPI policy may protect only the lender's interest, or the lender's interest plus some or all of yours. The term can't exceed 12 months, or the remaining loan term if that's 24 months or less. Coverage can be backdated, but not to before the date the car actually became uninsured. On non-real-estate collateral like a car, the premium can't be based on more than your unpaid loan balance as of the policy's effective date.

What your lender has to tell you at signing

Before a lender can place CPI that you pay for, §307.052(a) requires that the contract require insurance on the collateral and that you get a notice, in the contract or a separate document, saying that:

• you must keep the collateral insured against damage in the amount the creditor specifies;
• the insurance must come from an insurer authorized in Texas or an eligible surplus lines insurer;
• the lender must be named as the party paid in a loss;
• you must provide a copy of the policy and proof of premium payment if the creditor asks; and
• if you don't, the creditor may buy CPI on your behalf at your expense.

Pre-approval tip: find that paragraph before you sign, and ask the lender what deductible and coverage it requires. Then get an insurance quote that meets the requirement and add it to your monthly budget. That cost is part of what you're really paying. See total cost, not monthly payment.

If CPI gets placed: the 31-day notice

Under §307.052(b), no later than the 31st day after CPI is charged, the creditor must send you a notice by first-class mail to your last known address. The notice must state:

1. that the creditor bought, or will buy, CPI at your expense;
2. the type and extent of coverage and whose interest it protects;
3. the policy's start and end dates;
4. the total cost to you;
5. the interest rate on that cost, if it's different from your loan rate; and
6. how you can pay the cost.

The notice must be conspicuous: underlined, in all caps, in bold, or otherwise easy to see. If you have a cosigner or guarantor at a different address, they get one too. That's another reason for cosigners to stay involved; see what cosigners agree to. Payment terms for the CPI cost can include a balloon payment due within 30 days after your last scheduled payment, or amortization over the loan or policy term. If it's amortized, the lender must tell you about any change to your payment (§307.053).

How to get CPI canceled

§307.054 lets you cancel CPI at any time by giving the creditor proper evidence that you have the insurance your contract requires. If you prove you were already insured on or before the CPI's effective date, and still are, the creditor must cancel it and may not charge you any costs, interest, or other charges for it. When CPI is canceled or expires, unearned premium is refunded to the creditor, and the creditor must pass it to you by check or as a loan adjustment on the timeline in §307.055.

Practical steps:

• Send your declarations page to the lender right after closing, and again at every renewal or carrier change.
• Make sure the lender is listed as loss payee.
• Keep the lender's insurance-verification contact information with your loan papers.

Why it matters before you're approved

Under §307.051(b), a CPI policy can protect only the lender's interest, and its cost, plus any interest, gets added to what you owe. Don't assume it gives you the coverage you'd pick for yourself, or that it meets Texas's own insurance requirement for driving. Keep optional add-ons separate from required insurance when you compare offers; our GAP and add-ons guide explains the difference.

Bottom line

Texas lets auto lenders buy collateral protection insurance and charge you for it, but only with notice at signing, a mailed notice within 31 days of charging you, and a duty to cancel without charge if you prove you were covered. Read the insurance clause before you sign, price coverage into your budget, and keep proof on file with your lender.

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