How to Calculate a New or Used Car Loan Value

March 18, 2013

Calculating car loan value helps you decide whether to increase your down payment or avoid the loan altogether and find a new lender.

Calculating Car Loan Value

Car loan value is important because it dictates the maximum amount that may be financed on a new or used car purchase, relative to the manufacturer's suggested retail price (MSRP) or book value of a vehicle. Loan value is established so that the lender can limit the amount it finances on a depreciating asset like a car. A lender must be wary of the loan amount it extends to a borrower on a particular vehicle, because writing a loan for an amount greater than a vehicle's true market value increases a buyer's likelihood to default on the loan. You can find great deals on new and used cars on CarsDirect, and they can also give you information on the loan values used by different banks.

Loan to Value

The loan-to-value (LTV) amount is the total amount financed, relative to the value of the collateral. In a perfect car-buying world, the LTV on all loans would be under 100 percent, meaning that no buyer would finance more than 100 percent of the MSRP for new cars, or Kelley Blue Book value for used cars. In reality, lenders commonly finance up to 120 percent of the value of a vehicle, and some, like GMAC, finance up to 150 percent of the MSRP of a new vehicle on a situational basis.

The loan value of a vehicle offered by a bank or lender varies according to the type of car you intend to purchase, your credit history, monthly income and other financial transactions, like your mortgage payment. Since most dealerships offer financing options, it's important to do your own research to find out which lender gives you the lowest interest rate on your loan. If your credit history is good, you may be able to negotiate a lower rate.

5-Line Check

All of this is done with what is known as a "5-line" that you are asked at the start of any new or used car interview. A salesperson or manager will ask you for your name, address, phone, monthly income and your Social Security number. They then run a "bureau" on you, to see what your credit history looks like. This also helps the salesperson to steer you toward a vehicle priced so you can afford it.

If everything looks okay, as in you can pay your loan back on time, then the chances are good you will get your loan and be on your way.

Vehicle History Report

A vehicle history report obtained through companies like Edmund's and Carfax can be very helpful when determining a specific car loan value. This report gives you more detailed information on a particular car. While a vehicle may look to be in good or excellent condition, the vehicle history may reveal otherwise. Input the VIN number for a particular vehicle, and you'll receive information on the number of prior owners, any prior accidents or damage to the frame, title problems such as salvage or flood, service records, etc.

Mechanic's Inspection

It's always beneficial to have a mechanic check out a car you're looking to purchase. Mechanics can spot potential problems that may lead to a decrease in value. A bank will likely loan money based upon the used car loan value, however, if you run into problems later, you'll be stuck with the payments. Always try to get the opinion of an experienced, third-party mechanic.

Interest Rate and Terms

The greater the LTV on a loan, the more likely you will be assessed a higher interest rate. For example, a consumer shopping for a $25,000 car, who must finance $30,000 to cover taxes, means negative equity and registration fees have a LTV of 120 percent. Although most lenders would approve a 120 percent LTV loan, provided the buyer had a strong enough credit history, it would be at a higher rate than a buyer who only needs to finance 100 percent LTV. Buyers who place large down payments and finance much less than the fair market value of a vehicle may also have higher interest rates, as the lender will be unable to make interest on a large balance, so they simple raise the rate to recoup the otherwise lost profit.

Down Payments

If you have visited dealerships and had trouble getting an approval because you must finance much more than the car's loan value, you may need a down payment. For example, a prospect looking to finance $40,000 to purchase a vehicle with a market value of $30,000 would be at 133 percent LTV. Many lenders would not approve this loan. If the lender would approve the loan at 120 percent LTV, the buyer must arrange a down payment of $4,000, to bring the LTV to 120 percent. Determining the exact requirements for approval varies from lender to lender, and the bank may not discuss these matters with the consumer. If this is the case, it is best to sit down and discuss your situation with a dealership finance manager.

New Cars

Loan value on new cars is usually equal to the car's MSRP or dealer invoice price, depending on the lender. If the structure of your loan requires you to finance an amount over 100 percent of the MSRP or invoice price, you could face a higher interest rate or be required to place a down payment. To determine the value, you need to know the year, make, model, interior and exterior condition and any extras such as an alarm system or anti-lock brakes.

Used Cars

Calculating the loan value on a used car is more complicated than on a new car. Some lenders base their loan valuations on the fair book value of a used car, equivalent to the Kelley Blue Book value fair trade-in value. On used vehicles that are only one or two years old, the lender may base their valuation on the new vehicle invoice price, or a certain percentage of the invoice price. Say, for example, 80 percent of the like-new invoice price. This may limit the total amount that can be financed on a used vehicle. In any case, loan value is calculated differently by each lender, so be sure to ask a finance representative at your dealership if you have any specific questions.

Auto Loans

As a buyer, you should find out the amount of money you can spend on a car purchase. This includes taxes, fees and insurance costs. Once this amount is finalized, get auto loan rates from different banks to ascertain a good deal. Before you're offered any loan rate on a used car from a lending institution, you will be asked for personal details such as social security number, credit history, monthly income and tenure of employment. Lenders will ask for information on mortgage payments to find out your financial position. If you choose to purchase a car from a used car dealer, the dealer will offer you a deal on an auto loan. In order to determine if this deal is worthwhile, do your own research before heading to the dealership.

Determine Your Interest Payment

You need a copy of your credit report to be able to estimate what interest payment you will be charged. When you have no credit or poor credit, you need to pay a much higher interest payment and perhaps even a higher down payment. One of the many online car loan calculators can help you to determine what your interest payment should be.

How Long Do You Need the Loan For?

The length of the loan is a deciding factor in how to find your car loan value. The longer you take to pay off your loan, the more interest you accrue. A loan for five years will cost you quite a bit more than a loan over a 2 year term. To reduce this amount, you can add extra payments toward the principle amount, thus shortening the loan.

Negotiating Auto Loans

To negotiate an auto loan with a dealer or a lending institution, it's advisable to have sound information on your personal credit history or finances. It's also beneficial to do your research at Kelley Blue Book and consult NADAguides to find out the true value of used cars. The cost of maintaining a used car should also be factored into the price. Have a professional mechanic take a look at the vehicle you intend to purchase. If you feel that the used car will cost more to maintain in the long run, negotiate a low purchase price or look for a better vehicle. Since some lenders offer higher rates of interest on used cars, it's best to shop around to find the lowest interest rate on your auto loan.

How to Calculate Used Vehicle Loan Value

  • Bear in the mind the actual cost of the used car and negotiate a good purchase price with the dealer or private seller.
  • Take researched information obtained from Kelley Blue Book to the bank or credit union at the time of application for a loan.
  • Research various car loan rates listed online, and after careful evaluation select one that offers you a low interest rate.
  • Use the car loan calculators available on several websites such as Kelley Blue Book, Bankrate, CarsDirect and State Farm Insurance.
  • If you have good credit history, use these scores to negotiate a lower rate of interest.

Tips for Buyers

Negotiations are important. The rates aren't fixed until documented and signed. Read information on auto finance to know how to negotiate rates of interest and save money. Knowing the auto loan value, you will be able to calculate your best down payment. To calculate your down payment, deduct the used car loan value from the total purchase price of the car. Once you understand these facts and figures associated with the car purchase, you will be better equipped to handle payments and monthly installments without any difficulty.

Related Questions and Answers

How Can I Find the Auto Trade In Value?

The auto trade in value is available to you on line at KBB.com. To find the trade in value for your car, go to the used car side of KBB and plug in the particulars for your car and give it an objective look over. Everyone wants to see their car as excellent. The industry, however, uses fair. Look at the range that is returned when you've finished the form and take the "fair" value. Then, subtract about $2,000 for the investment the dealership will be making in your car, and you have the trade in value of your vehicle.

Which Source Is the Industry Standard for Car Book Values?

The source for car book values across the country is Kelley Blue Book. It is not only used by new car dealerships, but also by used car dealerships, banks, insurance companies and even in-house factory finance arms. It is the 'Bible' of the industry and the one referred to most often. The other major contenders are NADA Guides, the "Black Book" and the Galves Guide Series. If you visit most dealerships, you will see a combination of all these guides in use. After KBB, the one you should know about is the Galves Guide because, it is the one that most dealerships like to use. Its figures are the most conservative.

How Can I Find a Car's Resale Value?

A car's resale value is the trade-in value, plus any work that must be done, plus an 8 percent net profit. That is the formula any car dealership uses when determining whether a vehicle will be retailed or auctioned. If the investment in repair is too large, it is auctioned. If it is not too large and the body is in good shape, then it is held for resale. The final net value is arbitrary and may vary a percentage point or two across the country. To gain a better appreciation, go to kbb.com and fill in the used car form. Check "fair" value, adding $2,000 for repairs and tagging on 8 percent.

Why Is there a Difference in a Vehicle's Trade In and Resale Value?

Vehicle trade in value is a cash component of a car sale. It is the amount of money a dealership is willing to lay out for your car in a deal on a new car. It is real money, as checks are cut and balances are paid off by the dealer. The trade-in sets the resale value of the vehicle. Dealers will automatically mark up a traded vehicle—if it survives muster—roughly 30 to 35 percent. Of this markup, the dealership is figuring how much they will actually have to invest in the vehicle to make it sellable at a top price. Of the markup, the dealership will see about 8 percent after next sale.

What Is the Most Popular Source for Finding Muscle Car Values?

Muscle car values are primarily found in documents that cater to a specific audience. For example, superstock.com or musclecars.com are two sites of interest. Then, of course, there's the "Bible" of the old car world: Hemmings, that has listings for about every car ever made. As does oldcarsweekly.com. Kelley Blue Book is said to be considering looking into this market, and the National Auto Dealers Association (NADA) has a series of guides that cover muscle cars. Even edmunds.com or carsdirect may list muscle cars. Muscle cars are defined as those built between 1955 and 1970 that are powered by bored and stroked versions of famed V-8 engines.

Need a Car Loan?

It only takes a minute.
Comments