The loan value of a used car is not the same as its price or book value. Loan value is the amount a lender will let you borrow to buy the vehicle. This is important because the loan value may be less than the price. If so, you'll need enough of a down payment to cover the difference between the cost of the car and the loan value. Used car loan values are based on the book value of the particular vehicle and the lender's policies.
Evaluate the car. A vehicle's book value -- and therefore its loan value -- depends on its individual features and condition. To start, you'll need the following information:
- Year, make and model
- Current emissions test
- Maintenance records and vehicle history, if available
- Title information
A car title can have a bearing on its value. A "clear title" -- one that shows no one but the seller has a claim on the vehicle -- is best. Some cars have been issued titles after being salvaged and repaired following damage resulting from an event like an accident or flood. A car title may also reveal that it was used as a rental or commercial vehicle. Any of these circumstances can impact the car's loan value.
The condition of a car is based on several factors. Kelly Blue Book rates vehicle condition as poor, fair, good, very good and excellent. Check the following items for wear and tear or possible mechanical problems:
- Paint and body, including any past work performed
- Windshield and lights
- Frame condition and past damage
- Wheels and tires
- Interior features, including upholstery and electronic devices
- Steering, brakes and air conditioner
Determine the book value of the car. Plug the information from Step 1 into evaluation tools on the Kelly Blue Book or NADA websites. These services provide fair market value estimates that lenders typically rely on when figuring car loan value.
Contact the bank or credit union where you plan to finance the car. Ask for the loan to value ratio for auto loans. The LTV is the maximum percentage of the book value the lender will let you borrow. Used car loan value is calculated using the LTV. If your bank tells you the LTV is 80 percent and you found that the book value of the vehicle is $15,000, you'd have book value of $15,000 times 80 percent LTV, which equals a $12,000 loan value. In this example, the bank will lend up to $12,000.
There is no hard-and-fast rule for loan values. Some lenders even allow you to borrow more than the book value. If you're short on cash for a down payment, shop around to find a lender that will assign a larger loan value for a car loan. Of course, you may be able to negotiate the price with the car dealer as well and get an offer that is less than the book value.