If you take out a loan or sign a lease contract in order to purchase a new car, bear in mind that cars depreciate rapidly during the first few months after they're driven off the lot. It's not unusual for a car to lose 30 percent of its value, or more, during the first year of its life.

When you're choosing insurance coverage, remember that if you get into an accident and your car is totaled, your collision insurance is designed to compensate you for the market value of the car--not the balance of your loan. With gap insurance, lease and loan balances are covered if your car is totaled.

Do You Need Gap Insurance on a Leased Car?

Many car buyers who make little or no down payment, allowing their lease or loan to cover the full cost of their purchase, spend the first few months of ownership carrying a debt that is worth more than the value of the car.

If you fall into this category, and you have an accident during the upside-down period of you loan repayment, the coverage you receive from your collision insurance will still leave you with a balance on your loan. If this happens, you must pay that balance in addition to the deductible on the insurance policy for the car you no longer have.

This can cause significant financial hardship for some buyers, especially those who need to buy another car right away.

Gap Insurance versus No Gap Insurance

Gap auto insurance can protect you from this possibility. With gap insurance, the policy provider pays lease and loan payments that extend beyond the market value of the totaled car. With no gap insurance, new car buyers will be covered by their collision insurance, but only for a portion of what they owe.

If you intend to buy a new car with a very low down payment, consider adjusting your auto insurance policy to include gap insurance. Lease terms sometimes contain automatic gap insurance provisions. If you're leasing your car, check the terms to see if this coverage is already included.