Understanding the book value of your modified car | Selling vs Trade In

As car enthusiasts one of the dilemmas we face is what to do with a modded car when it is time to move on to something new. You could part it out, you could trade it in at a dealer, or you could try to sell it on your own privately. However as many of you know selling a modded car on your own can be a pain. Buyers call and say they want to come see the car, then flake out. Or they call at 3 am with a lowball offer, like you're a crack head desperate for the money. Even if they show up and make a reasonable offer, you may find the buyer can't get approved for a loan. Now they just beat on your car for no reason. We all want to get a little bit back from our mods. This isn't unreasonable to a fellow enthusiast. But here's why banks don't care about your mods, and why it can sometimes take a while to find the right buyer for your car.

When banks are evaluating whether or not to give someone a loan for a car, there are a number of factors they will use. This is all based on the risk of them getting the car back and having to resell it. If that happens the banks want to do it in a way where they don't lose money. Lets look at the factors that affect someone's ability to get a loan.

First is the car itself. Banks look at how easy or hard it will be to get rid of a car if you default (don't pay) on your loan and they have to repo it. Newer cars with lower miles are easier to get rid of, whereas older cars with more miles are harder to get rid of. This is why newer cars are easier to get a loan on and have lower interest rates. Typically banks prefer cars that are 5 years old or newer, and have less than 80,000 miles.

Second is how the car "books out." Banks look at NADA. So no matter how much Kelly Blue Book says its worth (NADA and KBB are sometimes thousands of dollars apart), or how much you see other one's going for, banks are going to use NADA as their guide for pricing. This is where sellers start to run in to issues with trying to get a bunch of money for mods. Based on the NADA book value vs. the asking price the banks calculate something called Loan to Value or LTV for short. I'll make up an example of a car NADA says is worth $10,000. Lets say you're asking $12,000 because you have $6000 worth of mods in to the car. To a potential buyer this may seem reasonable. To a bank this is 120% LTV (i.e. it's 20% over NADA). They use this LTV number and compare that to the buyer's credit score.

A person's credit score is basically a means to measure how likely they are to pay back their loan. If the bank doesn't feel like a person is likely to pay them back, they aren't going to be willing to lend more than the car is worth. Let use the same example from above. The bank gives out a $12,000 loan for a car that is worth $10,000. The buyer makes 3 payments of $250 before defaulting. The bank is now stuck with an outstanding balance of $11,250 for a car that is only worth $10,000. For this reason, banks will generally lend between 80-130% of NADA book values. How much of that an individual can get depends on their credit score. The higher their credit score, the higher LTV the banks are willing to lend them. If they have not so great credit, they may not even allow for the full value of the car. This means the buyer needs to have enough cash to compensate for the difference in loan vs. the sale price.

In our example, if the bank will only lend your buyer 80% of NADA ($8,000), the buyer would need $4,000 down.

So what does all this mean? It means trying to sell a car for over it's NADA book value can be hard and take some time. Even if what you're asking for is reasonable for the mods, the banks don't care. It also means that trading it may be a lot less hassle*. Sure it's less money, but it is guaranteed money and you don't have to worry about any of the titling. The question you have to ask yourself is how much is your time worth?

I hope this is helpful the next time you go to sell a car. Or that it at least sheds some light on your past experiences trying to sell a car. If you have further questions about banks, and financing cars feel free to email me! robertpflugh@stpautos.com

* Some dealers won't take modded cars. That's dealer speak for "We don't have sales people who know anything about aftermarket modifications."