By John Campbell

If you’re purchasing a new automobile with any less than 20 percent down, “gap” insurance may save you from shelling out thousands of dollars to pay off your auto loan if your vehicle is stolen or totaled.

If you’re like many consumers, you probably assume that your current auto insurance policy is sufficient to pay off your vehicle if it’s stolen or totaled. If your down payment is lower than 20 percent, this assumption may be a costly one. The moment you drive any new vehicle off a dealership’s lot it may depreciate in value as much as 20 percent. With a low or no down payment, you may be upside down on your auto loan for up to 2 years or even longer. As long as you’re upside down in your loan payments you’ll owe more than your vehicle is worth. You don’t want to be in this position.

Even if the vehicle is stolen or totaled the same day you purchase it, a typical auto insurance company will only cover around 80 percent of the purchase price of what is now considered to be a used automobile. Without gap insurance, you’ll have to come up with the remainder of the loan balance out of pocket, with the added burden of having to find and finance yet another vehicle. With gap insurance, you don’t have to worry about being upside down on your auto loan.

Gap insurance bridges the gap between the financed purchase price and the current fair market value of the vehicle. If you purchase a new Hyundai Elantra for $13,400 and it depreciates to $11,500 the same day you purchase it, gap insurance will cover the $1,900 in depreciated value if the car is stolen or totaled. Otherwise, your auto insurance company will only cover the depreciated value of the car and you’ll be stuck paying $1,900 with nothing to show for it.

Gap insurance may be offered by your lender when you’re approved for an auto loan. If your lender doesn’t offer gap insurance you may be able to purchase a policy from your auto insurance provider or an independent insurer. It may automatically be included as a premium with some auto insurance policies. If you want gap insurance you may need to shop around for the best prices and coverage. Luckily, most gap insurance policies should be relatively inexpensive.

You may find some policies for under $20 for 6 months or pay a lump sum as low as $299 for coverage over the life of the loan. Some policies from independent insurers also offer to pay your deductible for you in the event you would need to file a claim. You will want to find out exactly what any gap insurance policy will cover before signing the dotted line. The best policies will cover losses due to theft, acts of God (fire, flood, earthquake, etc.), or major auto accidents.

Gap insurance may not be free, but the amount of money it can save you as long as you’re upside down on your auto loan may be considerable. Going without could prove a very costly gamble if your vehicle is lost.

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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.