What Is Single Interest Insurance?
Single interest insurance—also known as vendors single interest insurance or VSI insurance—covers the interests of one of the two parties that co-own a property. This type of insurance typically covers a portion or all of the outstanding value owed to a lender for mortgaged or leased property.
Single interest insurance generally applies only to the interests of a lender or financing company. VSI insurance is structured to protect the interests of the lender but not the borrower of home, auto, or other consumer loans. While the lender may pass the cost of the VSI premiums to the borrower, the borrower receives no protection in the event the collateral (such as a car or home) is destroyed or damaged.
- Single interest insurance, also known as vendor single interest insurance or VSI insurance, protects the lender but not the borrower of home, car, or other consumer loans.
- Single interest insurance covers the loss or damage of a loan's collateral, which is the underlying high-value asset such as a car, boat, or home.
- In the United States, some states allow the lender to pass the cost of a VSI insurance policy to the borrower, who may be required to purchase the insurance in order to receive a loan.
- Lenders might opt for blanket coverage on their VSI insurance policy, which offers broad coverage options for their entire consumer loan portfolio.
- This coverage might include skip account protection, theft protection, errors and omissions coverage, and repossession coverage.
Understanding Single Interest Insurance
In most cases, single interest insurance covers damage to or loss of a loan's underlying asset. Often, it also includes the lender's cost of repossessing that asset, if necessary. Financing companies that lend to customers with marginal or poor credit sometimes require this type of coverage to insure against the cost of customer default. Some states permit lenders to pass the cost of the policy's insurance premium to the borrower.
Benefits of Single Interest Insurance
The vast majority of single interest insurance policies cover the lender's interest in vehicles and other high-value personal property, such as pleasure boats and watercraft. Single interest insurance policies commonly offer gap coverage, which reimburses lenders for the difference between the value of the asset and the outstanding loan principal.
Lenders might opt for blanket coverage, which offers broad coverage for their entire consumer loan portfolio. Instead of following up on and tracking individual policies, blanket coverage enables lenders to reduce their administrative costs. Coverage options might include:
- Skip account protection to reimburse the expense of tracking down default borrowers
- Theft protection to cover assets which may be damaged or stolen
- Repossession coverage to offset the costs and damages incurred during the repossession process
- Lien coverage to protect against errors and omissions on title paperwork
Single Interest Insurance and Buying Vehicles
Most states require drivers to provide proof of automobile insurance before they will allow them to drive a vehicle legally. Likewise, financial service companies typically need 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 insurance.
A finance company also may request single interest coverage if the borrower's credit history is weak or lacking, making default more likely.
Lenders may also require single interest insurance for borrowers who do not have a credit score low enough to deny the loan but do not have a strong score or much credit history.
Example of Single Interest Insurance
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 car a total loss. The borrower's insurance policy calculates the value of the vehicle minus depreciation at $29,000.
Since the borrower still owes the finance company almost $35,000 in outstanding principal, the insurance company sends the check for $29,000 directly to the finance company. In this scenario, the borrower is still on the hook for the remaining $6,000 of principal on a car that they can no longer drive. The borrower may decide to stop making payments, defaulting on the loan. The finance company's vendor single interest insurance policy will cover the $6,000 on which the borrower defaulted.