Gap insurance, also called gap auto insurance, is a form of coverage that can help you pay off the difference between the market value of your car and the balance on your loan if you get into an accident and your car is totaled.

Estimating car value is an important first step if you're trying to decide if gap auto insurance is right for you. Take two things into account in order to do this accurately: equity and value.

How Much Equity Is in Your Car?

First, how much equity will you have in the car when you drive it off the lot? If you'll be making a significant down payment on the car, or if the car is pre-owned and its depreciation rate has slowed, gap insurance may not help you very much and may not be worth the cost of the premiums.

If you make a very small down payment, however, and have very little equity in the car, you may spend a long period of time carrying an upside-down loan balance, owing more on your loan that the car is worth. In this case, gap auto insurance can save you from potential hardship if your car is totaled and your collision coverage can only reimburse you for the value of the car, leaving you with a high remaining balance on a loan for a car you no longer have.

What Is Your Car Worth?

Second, estimating car value means determining how much a buyer would pay for your car if you were to sell it. The Kelley Blue Book® can help you find out how much your car has depreciated in market value since the day you bought it. For gap insurance purposes, however, the only calculation that matters after the car is totaled is the value your collision insurance provider assigns to the car.

If you're considering buying gap insurance, estimate conservatively. Assume that your collision coverage will compensate you for no more, and perhaps even a bit less, than the Kelley Blue Book® value.