Single Interest Insurance

What is 'Single Interest Insurance'

Single interest insurance covers the interests of one of the two parties that co-own property. This type of insurance typically covers a portion or all of the outstanding value owed to a lender for mortgaged or leased property.

BREAKING DOWN 'Single Interest Insurance'

Single interest insurance typically applies only to the interests of a lender or financing company, since a lessee’s interest in the insured property usually overlaps with the lender’s interest. In most cases, single interest insurance covers damage to or loss of a loan’s underlying asset. Often, it also includes the cost of repossessing that asset, if necessary. Financing companies who lend to customers with marginal or poor credit sometimes require this type of coverage to insure against the cost of a customer default. Many states permit lenders to pass the cost of this policy to the borrower.

Common provisions of single interest insurance policies

The vast majority of single interest insurance policies cover vehicles and other high-value personal property. Single interest insurance policies commonly offer gap coverage, which reimburses lenders for the difference between the value of the asset and the outstanding principal on the loan. Other coverage options might include skip coverage protection for lessees who fail to make payments, theft protection or coverage for costs and damages involved in the repossession process.

Example of single interest insurance

Most states require drivers to provide proof of automobile insurance coverage before they will allow them to drive a vehicle legally. Likewise, finance services companies typically require proof of insurance before underwriting an automobile loan. If for some reason a buyer cannot show proof of insurance when purchasing the vehicle, the finance company might require that the buyer purchase vendor single interest (VSI) insurance. A finance company also may require single interest coverage if the borrower’s credit history makes a debt default more likely than it would be with a typical buyer but not high enough for the finance company to deny the loan entirely.

Suppose a risky borrower purchases a $36,000 vehicle. A year later, the borrower gets involved in an accident and an insurance company declares the vehicle a total loss. The borrower’s insurance policy calculates the value of the vehicle minus depreciation, which comes out to $29,000. Since the borrower still owes the finance company almost $35,000 in outstanding principal, the insurance company sends the check directly to the finance company. This leaves the borrower on the hook for the remaining $6,000 of principal on a car that no longer can be driven. The borrower decides to simply stop making payments. The finance company’s vendor single interest insurance policy covers the $6,000 on which the borrower defaulted.