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Collateral Insurance – You’ve finally bought your dream car

You’ve been saving up for six months for the cheap car insurance no down payment. The monthly payments are affordable, and you believe you can handle the car note and the insurance. Unfortunately, a month after you bought the car you are laid off from your job. Maybe the monthly payment is higher than the original quote from the agent. Whatever the situation might be, you can no longer afford the auto insurance for the car.

What will you do? What are your options? Well, one option could be from Viking Insurance, collateral insurance or sometimes-called “Force Placed” insurance. A collateral insurance policy is a physical damage policy used to protect the interest of a borrower, only. An auto finance company will purchase a policy to protect its interest in a vehicle it finances.

The coverage for this plan protects the interest of the company but doesn’t protect the interest of the borrower. This policy doesn’t provide any liability, such as bodily injury or property damage liability; it only provides coverage for comprehensive and collision losses. Some of the features of the collateral auto insurance are:
1. A premium based on the loan balance or the Actual Cash Value (ACV) of the vehicle, whichever is less.
2. A premium that is the same for all members of the financing institution. Remember it is the loan balance or ACV that counts.
3. The loan amount and the location of financing institution’s constituents are also considered.
4. If your vehicle is stolen, this type of insurance will pay off the balance of your loan.
5. If your vehicle is in an accident, the policy will pay to repair your vehicle. You will pay a deductible, which is usually $600.
6. This policy can be issued even if you don’t have a driver’s license. Most auto insurance companies will not insure an unlicensed driver.
7. The premium is usually guaranteed for 12 months. The premium will decrease annually as the loan balance or ACV decreases, which will make it even more affordable.

This type of policy is not for everyone who is financing a vehicle

Collateral insurance is the ‘last resort’ of physical damage coverage; one should at least try a physical damage company.
Let us use an example:
Your vehicle:
Your 20 down payment car insurance:
Purchase price (after down payment): Balance owed to finance company: 2008 Jeep Cherokee $ 3,000
$30,000
$30,000 + Interest

Your equity in the vehicle is only $3,000 at the time of purchase. As you make your payments, your equity in the vehicle will increase. At first, most of your payments will be interest payments. Initially, very little of your payment is applied to the principal of your loan. This is the only period for which having a collateral policy would make sense.

In the previous example, if you had let your auto insurance expire, and had a severe accident, you would have been responsible for $30,000, plus interest, to the finance company. The collateral policy would pay off the loan, but you would lose your 20 down payment car insurance and any other equity that had accrued.

Taking this example into consideration, what type of consumer could use a collateral auto insurance policy?

  1. A Consumer with a bad driving record, consisting of accidents, moving violations, and suspensions. The collateral coverage could be more affordable because it does not consider driving records.
  2. A young driver who cannot afford full coverage, because of age and an inexperienced driving record. A collateral policy does not consider age and driving experience in determining rates.
  3. A consumer who pays a small down payment for their vehicle, therefore they have a small amount of equity in the car. A consumer who puts down half, or received a high trade-in amount for their used car, should not use this type of policy.
  4. A consumer who cannot afford a down payment for full coverage on their vehicle. A collateral policy is paid monthly and combined with your monthly car payment. A $20 down payment is not needed.

If you have to buy a collateral policy, you should never consider the coverage as a permanent solution to your auto insurance problem. This policy only protects the financing institution’s interest, not yours.

Some of my previous clients had collateral policies

Many believed the policy covered liability and physical damage coverage. Others did not know that the policy only covered the finance company; none of the clients had read their insurance policy carefully or had the coverage explained to them. In light of this, you should only obtain collateral auto insurance after the policy has been thoroughly explained to you. Sit down with your agent or broker to explore all the other options available to you.

 

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