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Understanding your car’s value can be a mystery.
Selling your car can be an exciting experience — especially if you’re upgrading to a newer vehicle. Finding the best price for your car depends on its value, and if possible, how to increase it.
Knowing how car values work can also help you choose your next vehicle so you can find one that keeps its value as long as possible. A vehicle that holds its value may also help your chances of getting approved for auto loan refinancing when interest rates drop.
That’s why it’s so important to understand how used car values are calculated — and what you can do to get yours as high as possible.
There are several elements that determine how much a used car is worth. These include:
All of these play a role when determining your car’s retail, trade-in, or residual value.
There are multiple types of book value. The most common types you’ll come across are retail value, trade-in value, residual value, though there are others.
The retail value is the price set by the dealer when selling a used car. It will almost always be higher than the trade-in value because the dealership needs to make a profit when they resell it to another customer.
The trade-in value refers to how much a dealership thinks your car is worth. If you take a car to the dealership, you can use the trade-in value to reduce the cost of buying or leasing a new car.
The trade-in value is usually less than the retail value because the dealership is acting as the middleman. In order to make a profit, they need to put a markup on the vehicle before listing it. Many dealerships will also fix up the car before reselling it, which also accounts for the disparity.
Finding a private buyer can be difficult, so some people are willing to give up that extra money for the convenience of selling to a dealership. Always try to negotiate the trade-in value with a dealer. If you have time, take the car to several dealerships to see who offers the highest trade-in value. Dealerships often have special deals where you can get an extra $500 on your trade-in.
The retail or trade-in value of a car is based on its specific features, like mileage, popularity, and overall condition. The residual value of a car is how much it will be worth at the end of a lease or balloon loan term.
The residual value is a percentage of the car’s initial price. For example, if a car costs $30,000, and has a 50% residual value after a three-year lease, it will be worth $15,000 at the end of the lease.
Dealerships and lenders use the residual value to determine the monthly payments. A car with a high residual value will have lower monthly payments because it will depreciate less over the course of the lease. A vehicle with a low residual value will have higher monthly payments because it will depreciate faster.
Dealerships and auto lenders use third-party companies like ALG for finding a car’s residual value. Unlike with retail or trade-in value, there is no way to increase the residual value because it’s controlled by a separate company.
You can research a car’s residual value before leasing it. ALG publishes an annual list of the residual values of different vehicles.
If you want to refinance an auto loan or sell a vehicle, you first need to know how much your car is worth.
For starters, you can check valuation tools like Edmunds, Kelley Blue Book, and NADAguides. When you search for the car’s valuation, you need to know its exact mileage, VIN, and condition to get the most accurate price.
If you plan to sell directly to a consumer, you can find a general estimate of the value of your car by checking your car on sites like Autotrader, eBay, and Craigslist. For example, on eBay, you can filter the listings by “sold” to see how much the car has actually sold for. You should also compare the figures by state. Some parts of the country may have higher car prices than other regions.
Some critics find these sites to be overly optimistic when appraising value. To find a more accurate figure, take your car to a couple local dealerships to get their trade-in value.
When selling a car to an individual, the easiest way to increase the trade-in value is by making it as presentable as possible. Take a day to wash the car’s exterior, vacuum the interior, and buff out any scratches. A clean car with no dirt, dog hair or clutter will look more enticing than a car with mud caked on.
If you have a car loan, it’s important to know your vehicle’s value in order to determine refinance eligibility.
During the refinance application process, your loan officer will ask you some questions to do a bookout, like an appraisal, to get your car’s value. That value will be used to figure out your loan-to-value (LTV) ratio. (This is your car’s value compared to how much you owe on the loan.) In general, your LTV ratio should be 130% or less to qualify for an auto loan refinance.
An LTV over 100% means you owe more on your loan than your vehicle is worth and are upside down on your auto loan.
In some cases, an excellent credit score or low debt-to-income (DTI) ratio may override a high LTV. Sometimes you can put a down payment on the refinance loan to make up for the difference. Your lender or loan officer will offer options if there’s anything else you can do to get approved.
Before you buy a new car, do some research to understand how it will depreciate over time. A car that keeps its value longer is a better buy.
If you already have an auto loan, it doesn’t hurt to keep tabs on your loan payoff, in case you want to refinance.
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