Collision insurance covers damage to your vehicle, but is frequently not sufficient to pay off the total amount of the car loan if you’ve been in a serious car accident involving a total loss. Many of my clients find this out the hard way after a serious accident.

In this post, we’ll explain how car gap insurance can help you save thousands of dollars in the event of you get into a serious car accident that totals your vehicle. The reason for this is that the moment you drive a new vehicle off the dealer lot, your car insurance policy is probably inadequate to protect you financially in the case of a total loss. That’s because your regular auto insurance is designed to pay the lender the vehicle’s current cash value — not the current loan balance. The difference can be thousands of dollars. Data shows that once your new car — owned or leased — leaves the lot, it is considered a used car and the value of it drops significantly. In fact, the average new vehicle loses 30 percent of its value the first year. By year three, that loss in value will be close to 50 percent, says Philip Reed, senior consumer advice editor at Edmunds.com, an auto data provider.