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Get the gap if you're upside-down

You just totaled your six-month-old car in an accident. But you have full collision and comprehensive insurance coverage, so you're fully protected and your insurance will replace your vehicle at no cost to you. Right?

Probably not, says Karl Brauer, Editor-in-Chief at Edmunds.com. Unless you have "gap" insurance -- insurance covering the "gap" between the actual value of your car at the time of the accident and the amount you still owe the finance company -- you could be out thousands of dollars.

All the great financing deals being offered these days -- such as no money down and no payments for months -- could make you even more vulnerable.

What's more, the gap amount can be considerable.

Although most finance companies require car owners to have full coverage on a vehicle, gap insurance isn't usually included. If your car is totaled, -- or sometimes if it's stolen -- especially within the first two years, you could be in for a nasty surprise, due to the rapid depreciation of new cars.

The minute you drive a new car off the lot, its value takes a nosedive. Essentially, it's not a new car anymore. But you still owe the full value of your loan. The term for the situation is called being "upside-down."

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Car owners often assume that if their car is totaled, it will be replaced at the amount they paid, or at least the amount they owe. Not so.

"A new car is worth approximately 30 percent less in three months than the day it was purchased, says Jessica Luck, of Nowogroski Rupp Insurance Group in Seattle, Wash. "You could own a car for three days and have what you consider to be full coverage, but if the car is totaled, you could owe 20 to 30 percent of the amount financed."

Say you bought a car for $30,000 and financed the total amount. In a few months that car might have an actual cash value of only $24,000. Meanwhile, your monthly payments haven't even made a dent in the loan. If the car was a total loss, your insurance company would only pay you $24,000 and you would still owe the lender the $30,000 you financed -- even more if you built tax and license fees into the amount financed.

"Even though gap insurance is important for people who buy cars, it is essential for those who lease," says Mary Butler, senior editor of cars.com. "Gap insurance basically originated with leasing." The upside-down nature of a typical lease is even more common than a purchase situation because the lessee usually has no trade-in and usually puts little or nothing down. Similar to a purchase, if the car is a total loss, you owe the difference between what you have paid and what you owe on the balance of the lease.

Often gap insurance is included in the cost of a lease and you don't have a choice of providers. If not, or if you're buying, your car dealer will probably be anxious to sell it to you. But shop around -- your best price will probably come from your existing auto insurer, if they sell it. Many do not.

Gap insurance is only available for new cars that are being financed and may not cover cars that are deemed total losses from other causes, such as theft and natural disasters. "Read your lease or your gap insurance policy to find out whether you are covered for all types of total losses or only in case of an accident," says Robert Ellis, a spokesman for CarBargains.com, a nonprofit consumer research group.

Some insurers include the benefits of gap insurance in their regular comprehensive automobile coverage. Others, such as MetLife Auto & Home insurance company doesn't offer a separate gap insurance policy, but will actually replace your car for one year or the first 15,000 miles, without depreciation even if you didn't finance it, says Michelle Rupp, of the Nowogroski Rupp Insurance Group.

But there is some good news regarding gap insurance -- it's cheap. According to Rupp, "The policies we write have never cost more than $14 for six months. It's a great value for everyone who finances a car."

-- Posted: Dec. 9, 2003

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