The typical 3-year-old car is worth $2,250 less than a similarly aged vehicle last year, Clark said, while the values of SUVs and big trucks have tumbled even more. A 3-year-old Toyota Tundra last year would have been worth nearly 60% of its original sticker price, but that resale value has since fallen to 40% for a 2006 version.

Retained value for 3-year-old models
Model'05 model in 2008'06 model in 2009Change
Toyota Tundra59.5%40.1%-19.4%
Infiniti QX5658.0%40.3%-17.7%
Hummer H255.0%37.5%-17.5%
Toyota Sequoia59.1%42.0%-17.1%
Industry average47.6%39.4%-8.2%
Source: Automotive Lease Guide

If you're not sure where you stand, you can use the Kelley Blue Book tool on MSN Autos to see how much your car is really worth and compare that with what you owe. Insurers typically pay an amount somewhere between the car's trade-in value and what you'd get in a private sale.

More information on car values, said editor Amy Danise, can be found in the NADA Guides compiled by the National Automobile Dealers Association.

Where to find it

Now, there are two scenarios where "underwater" drivers don't have to worry about gap insurance:

  • If it's already included in your lease. In some states, including New York, leases by law must include gap coverage.
  • If your auto policy is written to cover the gap. This isn't the norm, but some auto policies promise to pay off a loan regardless of the car's worth. Read your policy to see if you're covered for any gaps or call your insurer and ask.

If you don't have coverage already, the solution fortunately doesn't have to be terribly expensive.

You typically can buy the coverage:

From the dealership or auto finance company. This is probably the most expensive choice, especially if you roll the cost into your monthly note. You typically pay a one-time premium of $300 to $500 or more, plus interest if it's added to your loan or lease. Another disadvantage: You'll continue paying that interest as long as you pay on the car, even after you're no longer upside down on your loan.

From your current auto insurer. It's usually the best choice if your insurer offers the coverage. You can drop it once you're sure you're in the black.

From another insurance carrier. If your auto insurer doesn't offer gap insurance, you can look for gap insurance providers. Make sure they have top marks from one of the rating services such as A.M. Best, Standard & Poor's or Ratings.

The best time to shop for coverage is before you set foot on the dealer's lot, Reed said. He advises calling your insurer to get a quote for coverage as soon as you decide what car you're going to buy. But all isn't lost if you fail to plan that far ahead.

"It'll be cheaper through your agent than through a dealership," Reed said, "but you can always buy it (at the dealership) and cancel it later" once you've got coverage with your insurer.

If you're a savvy enough negotiator, you may be able to get the dealership to lower its premium, Meredith said, particularly if you already know what coverage would cost through your insurer.

Some dealerships and insurers require you to get the coverage when you buy the car, but others let you add it later. If you don't have gap coverage and need it, it's worth the effort to search for a company that will sell it to you.

Like most insurance, it's something you may never need, Meredith said, but "it's a really good thing to have if you need it."

Danise agreed.

"Gap insurance is a great value for the money," she said. "Your premium dollars are well spent, particularly in this economy.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.