What Value of Vehicle Do Banks Use When Using a Vehicle as Collateral?

Fair Market Value

A bank usually calculates the value of a vehicle used as collateral for a loan at the vehicle’s fair market value. This is the price that the majority of other comparable vehicles are selling for on the open market. The bank considers a variety of factors when determining fair market value, including mileage, number of sustained accidents, remaining original parts and special vehicles features. A vehicle with a low fair market value won’t be as useful for collateral in a loan situation as a vehicle selling for a high price. The bank generally wants collateral that can cover the cost of a loan if the bank must seize the vehicle due to non-payment of a loan.

Auto Loans

When you purchase a car, the bank or lending institution buys the car for you and agrees to allow you use of the vehicle while you make payments on an auto loan. Failing to make those payments will cause the lender to repossess the vehicle. A bank can, and usually will, repossess a vehicle, regardless of value, at any point during the repayment process if you miss even a couple payments. This move protects the bank’s interest and allows the financial institution to recoup as least a portion of the original price of the vehicle.

Auto Liens

A lien is a judgment by a court allowing a creditor to place a security interest in a piece of property you own to guarantee the payment of a debt. The court may grant a creditor a security interest in an automobile you own if the court deems the value of the vehicle sufficient to pay all or a significant portion of the debt. The lien entitles the creditor to a portion of the profits from the sale of your vehicle up to the amount of the debt you owe. This means your creditor could receive all of the proceeds from the sale of your vehicle.

Minimum Liquidation Value

Appraisers employed by banks usually establish a minimum liquidation value when determining the total value of your vehicle used as collateral. The appraisers then issue a certificate of guarantee to the bank, which locks in this minimum amount in the event the bank must sell the vehicle due to your default on your collateral auto loan. The bank may also base the amount of money you receive through your loan on this minimum value as a means of mitigating losses in the event of a default.

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