If you’ve ever purchased a brand-new car off the showroom floor, you know that its value decreases the moment you drive it off the dealer’s lot.

Most times, that’s not a big problem.

Unless your car is “totaled” – i.e., wrecked beyond the practical point of repair. In that case, your collision insurance will only pay up to the fair market value of the vehicle before the wreck.

Most times, that’s not a problem, either.

The GAP Scenario

However, suppose you drive that new car off the lot and are in a major collision on the way home. And suppose the car you just bought – and took out a $40,000 loan on – is now only worth $35,000.

The lender is going to want their 40,000 back, but your collision insurance will only pay $35,000. Where does that other $5,000 come from? It comes out of your pocket – unless you have GAP coverage.

How it Works

GAP stands for guaranteed asset protection, but it’s easier to think of this coverage in terms of its purpose. It’s designed to cover the “gap” between what you owe and what your car is worth in the event of a total loss.

This type of insurance can benefit anyone who buys a new car, but there are two instances in particular where you should strongly consider GAP coverage.

They include:

• Low Money Down: You put less than 20% down on your new car. The lower your down payment, the greater the risk if you don’t have GAP insurance.
• Length of Loan: Your loan term is longer than 60 months. The longer your loan term, the slower your principal balance goes down, so the longer you’re at risk if you don’t have GAP insurance.

Where to Get GAP Insurance?

As a savvy shopper, you should look around at car financing options. These should include saving money by getting your next car loan from your credit union. Even with credit union financing in place, the dealer will still try to sell you GAP insurance as an add-on to your car. Be sure to check with your credit union first. Chances are the credit union can sell you GAP insurance at a significantly lower cost than the dealer.

Remember, the dealer’s goal is to make as much money as they can — selling you as much as they can. In contrast, your credit union’s goal is to provide you with valuable member service. Buy your GAP insurance through your credit union and you can rest assured that you will be covered and know that you didn’t pay too much.

Disclaimer: You + Money posts are provided for informational purposes only and not intended to replace the advice of a financial, legal or accounting advisor.

* Guaranteed Asset Protection Plus (GAP Plus) is optional and will not affect your application for credit or the terms of any credit agreement required to obtain a loan. Certain eligibility requirements, conditions, and exclusions may apply. You may cancel the protection at any time. If you cancel protection within 90 days you will receive a full refund of any fee paid. You will receive additional information before you are required to pay the fee for this product.