Lenders insurance covers the finance provider’s interest in the collateral used to secure a loan.
Financing backed by collateral reduce a financial institution’s risk. Types of assets used to secure funds can include:
- Automobiles or motorcycles
- Motor homes
- Additional property
Banks need protection against possible financial loss if the collateral items are lost, damaged or destroyed. This single interest insurance protects against exposures such as:
- Physical damage: This protects the lender against losses due to uninsured or impaired items.
- Repossession: This covers costs associated with repossessing the physical assets used to secure funds.
- Skip coverage: This mitigates loss when the lender cannot locate the borrower or the collateral.
- Errors and Omissions: This safeguards against mistakes or accidental non-filing of liens.
This coverage typically applies only to the interests of the finance company. Gap coverage added to the policy can reimburse banks for the difference between the asset’s value and the outstanding principal.
Lenders insurance set up as a blanket policy covers all loans on and after the effective date. At each new origination, there is a one-time charge that the borrower often pays.
Financial institutions take on various risks when they provide funds to a borrower. Protecting their interest in collateral is essential to prevent possible losses with secured loans.