If you're about to buy a new car and you don't plan to make a very large down payment on your lease or loan, consider purchasing gap insurance, also called auto gap coverage. Buying gap insurance can protect you from financial loss if your new car is totaled while you're still upside down on your loan, or you owe more for the car than its market value.

Buying Gap Insurance: Gap Insurance Value for New Car Owners

New cars depreciate rapidly, sometimes losing up to 30 percent of their market value within the first year. It's not unusual for a buyer who makes a very small down payment to be upside on a car loan for the first few months after driving it home.

A new car owner may (and should) have collision coverage during this time, which can cover the market value of the car if it's totaled in an accident. Collision protection will only cover the cost of the car--not the balance on the loan.

For example, say you buy a car for $20,000 and make no down payment. You'll still owe $20,000 a week later--even if the car has depreciated and is now worth only $18,000. If the car is totaled during this time, your collision coverage will still leave you with a $2,000 balance on your loan that you'll need to pay on your own.

Is Gap Insurance Right for Everyone?

Gap insurance value is highest for drivers with little or no equity on their loans. If you've made a large down payment or have been driving the car for a long time and are no longer upside down on your loan, auto gap coverage won't help you much. But consider buying gap insurance if you expect to carry a high loan balance for a while. Your auto gap coverage premiums should drop as your gap insurance value, and the balance on your loan, both go down.