Why Your New Car Does Not Have an Estimated Market Value Yet
If you are looking to buy or refinance a car, it is a good idea to find out how much it is worth. An estimate of your car’s value from a company like NADA Guides, Edmunds, Kelley Blue Book, or others can give you valuable information on how much you should pay for your car. The analysts at such companies crunch data on millions of car transactions each year, trying to place a value estimate on every car in the market. While their estimated values may vary from the actual value of your car (mileage and car condition play a role in a car’s value), you can feel confident that reputable car value estimation services have good information on your car’s market value.
However, every year car valuing services fail to list market values for a large segment of used cars – new cars being sold on the used car market. So, the car you recently purchased may not yet have an estimated resale value yet.
Why Do Newer Used Cars Lack Estimated Values?
As already stated, car value analysts rely on large datasets to estimate the market value of used cars every year. This data primarily consists of transactions from the used car market.
Data on sales of cars that are more than a year old is abundant because such vehicles have generally been sold thousands of times in the used car market.
But little data exists on sales of newer used vehicles (i.e. those whose model years are within a year of the current year) because they simply have been sold fewer times. So, analysts are generally unable to give estimates on the values of newer used vehicles.
How Do Financial Lenders Evaluate Cars that Don’t Have Estimated Market Values?
When you finance or refinance a car, your lender needs to have some idea of how much your car is worth to evaluate your application for its Loan-to-Value ratio.
A Loan-to-Value ratio, or LTV, is a measure of risk that tells a lender how much it stands to lose on a loan if the borrower defaults. It is equal to the ratio of a car loan amount to the car itself. For example, pretend that a lender gives someone $25,000 for a $20,000 car. The LTV of the loan would be 125% [125% = $25,000 / $20,000]. If the borrower defaults, then the lender can repossess the car to try to recover its money. But the car is worth less than the loan balance, meaning the lender cannot recover the full value of its loan.
To manage the risk of lending, most lenders limit how high an LTV can be on any loan they make.
But calculating LTVs on newer used cars can be difficult because lenders lack accurate value estimates on such cars. So, they need other ways to calculate LTVs for these deals.
Generally, when evaluating car loan applications for newer used vehicles, lenders use rules-of-thumb to come up with reasonable value estimates, such as assuming that cars lose 10% of their values in their first few months on the road.
How Much Will the Market Value of My Car Drop in the First Year?
Cars lose value quickly, especially over the first few months of driving. While it is hard to calculate the exact depreciation of newer used cars, most car industry professionals accept that the depreciation early on in a car’s life is significant. Below is an illustration of car depreciation over time.
The illustration above is not a graph based on actual data. But the shapes of the depreciation curves illustrates the general principle that cars depreciate in value quickly early on and more slowly after a few years of driving.
The initial quick drop off in value corresponds to the period of time during which little data exists on newer used car values. All we really know is that cars depreciate quickly during their first few months on the road.
Refinancing a Newer Vehicle
Even if your vehicle is newer, you still may be able to refinance it to a lower monthly payment and interest rate. At Innovative Funding Services (IFS), we generally recommend waiting at least 60-90 days to refinance your car loan. While not all lenders will approve a refinance application for a newer vehicle, some will if your application meets their other lending requirements.
When you apply to refinance through IFS, your dedicated Finance Advisor will search for an auto loan that meets your needs from our network of 25+ national lenders. We offer up to 100% financing for those with credit scores of 525-850.