Image: Car Accident © Robert J. Bennett-age fotostock

Related topics: insurance, car insurance, debt, financial planning, Liz Weston

A weak car market isn't bad just for car manufacturers and dealers. If you're driving a late-model car, you may also be at risk.

Lower resale values for used cars mean your car is probably worth less than you think, and perhaps less than you owe. If your car is stolen or totaled, you may not get enough from your insurance company to pay off your lease or loan.

"The insurance company will pay you what the vehicle is (currently) worth, and that's not necessarily the same as what you owe," said Mike Meredith, an editor for MSN Autos. "It could be a lot less."

Fortunately, there's a cheap solution to this gap, and it's called GAP (Guaranteed Auto Protection) insurance.

Chances are good you need gap insurance if:

  • You purchased a new car and didn't have a substantial down payment -- at least 20% and perhaps as much as 50%.
  • You're leasing a car.
  • You financed your car for more than four years.
  • You rolled debt from your last car into your current auto loan.

Liz Weston

Liz Weston

These car-buying practices are usually bad ideas. They are, unfortunately, fairly common scenarios that typically leave people "upside down," or owing more on their cars than the vehicles are worth.

If you don't make a big down payment, for example, you'll be upside down on the car from the minute you drive off the lot. You could stay that way for years, depending on the length of your loan. If you get in an accident or the car is stolen during that time, you may be in trouble.

You could be pushed over the edge

Here's an example. You buy or lease a car for around $25,000. Several months down the road, it's totaled, but your insurance check covers only the car's current value, which is about $20,000. Not only do you have to find new wheels, but you're on the hook to the finance or lease company for a gap of about $5,000.

If you rolled debt from your old loan into your new one, the amount you owe could be even larger.

Few people in this economy, with unemployment hovering around 10% and credit scarce, would want to have to buy a replacement car while facing thousands of dollars in expensive leftover debt.

And if your finances are already shaky, the gap between what you owe and what you're paid might be enough to push you over the edge.

"It could be the difference between staying afloat and having to declare bankruptcy," said Phil Reed, a consumer advice editor for and co-author of the book "Strategies for Smart Car Buyers."

Even if you made a big down payment, you still could be upside down on your loan or lease because of falling resale values.

Volatility in resale prices started in 2008, when gas prices spiked, hurting sales and values of bigger, gas-guzzling cars, said James Clark, the general manager for ALG, which publishes the Automotive Lease Guide.

That malaise soon spread to all car types as the economy tanked, sales plummeted and manufacturers resorted to deeper discounts, driving down the values of their cars.