Identification

• Gap insurance is coverage that pays the difference between what your vehicle is worth and what you owe if the vehicle is declared a total loss in an accident or is stolen and not recovered. Without gap insurance, you would need to pay the difference out of your own pocket, which is an expense many people cannot afford. You typically purchase gap insurance when you buy the vehicle, and the cost is roughly 5 percent of the premium for comprehensive and collision coverage.
  
  

Upside Down

• You may be "upside down" in your loan, meaning you owe more than the vehicle is worth, for several reasons. If you still owed money on the old vehicle you traded in, that amount was probably rolled into your new loan, increasing your loan amount. A new vehicle also loses about 20 percent of its value due to depreciation as soon as you drive it off the lot. In these situations, gap insurance makes up the difference if the vehicle is totaled in an accident.
  
  

Leasing

• If you made little or no down payment on the vehicle, a situation that is common with leasing, you probably owe more than the vehicle is worth from the outset. In many cases, the leasing company includes gap insurance as part of the lease agreement. If it doesn't, be sure to purchase the coverage on your own, either from the leasing company or through a private insurer.
  
  

Extended Payments

• Many car buyers stretch their payments out for as long as five or six years, often because they made a small down payment or wanted lower monthly payments. However, this practice usually results in a larger total loan due to the accumulation of additional interest over time. If your auto loan term is 60 months or longer, you may need to purchase gap insurance.