If you lease a car -- or even if you buy one and put very little money down -- you probably need a little-known type of insurance called "gap" coverage.
As the name implies, gap insurance covers what your regular auto insurance doesn't: the gap between what your insurance company pays if a car is stolen or totaled and what you owe on a lease or loan.
Regular auto insurance only reimburses you for the value of your car when disaster strikes, not what it would cost to replace it. And most cars lose between 20% and 30% of their value once they're driven off the dealer's lot.
If, for example, you have $23,000 in payments remaining on a car, and you drive it into a tree, your primary auto insurer might determine that the actual cash value of the car was only $20,000. If your deductible is $1,000, you would be on the hook for $4,000. But that amount would be covered if you had gap insurance.
In the past, gap insurance was only marketed to people leasing a vehicle. That's because most people who bought cars tried to put down at least 20%, or roughly the amount a vehicle depreciates immediately after being purchased. So even if it was totaled before the permanent license plates arrived, the payout from a regular auto policy would cover most of the balance of the owner's loan.But these days car buyers are putting less and less money down, leaving them with the same gap in their coverage as people who lease.
Philip Reed, editor of Edmunds.com's Strategies for Smart Car Buyers, says that gap insurance has become far more prevalent as lending practices have changed.
"More and more, people are going zero down," Reed says. "With zero down, you drive off the lot with a car that instantly depreciates by 20% to 30%, and you're now 20% to 30% upside-down on your loan."