What a car wreck could cost you

By Liz Pulliam Weston

Turmoil in the 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.

Plunging 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, producer 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.

I outlined why these car-buying practices are usually bad ideas in "The real reason you're broke." 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. One out of five vehicles financed in February 2009 included debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com, and the average amount of so-called "negative equity" was $4,676.

Few people in this economy, with layoffs looming and credit tight, 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, consumer advice editor for Edmunds.com 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 resale values have plummeted so quickly.

Volatility in resale prices started last year, 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.

"Across the board, we're seeing a severe decline in resale performance," Clark said. "Conditions really deteriorated quickly."

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 2009	Change
Toyota Tundra	59.5%	40.1%	-19.4%
Infiniti QX56	58.0%	40.3%	-17.7%
Hummer H2	55.0%	37.5%	-17.5%
Toyota Sequoia	59.1%	42.0%	-17.1%
Industry average	47.6%	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.

Another source for car values, said Insure.com editor Amy Danise, is the NADA Guides compiled by the National Automobile Dealers Association.

Continued: Where to find it

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