What Is Book Value of a Vehicle and How to Calculate It
Knowing the real value of your car will be important as it affects the real cost of ownership. While the technical terms that dealers and car insurers use can get really complicated, the underlying concepts are not that hard to understand. A central concept is that of the 'book value' of a car.
To understand the book value and how to calculate it, consider the following example. Suppose you buy a truck today for $35,000. When you go to insure the truck, the insurer will assess its value at, or near, $35,000. The insurance premiums you pay will be designed to replace a $35,000 truck in case it is completely wrecked in a collision.
Suppose, however, that you bought the car used, five years since the car was brand new. Your purchasing price was $20,000. When you go to insure the car, would you be happy paying insurance premiums for a $35,000 car? No, you would be looking to pay lower premiums, in line with the lower resale value of the used truck. This example illustrates that the book value of the truck has fallen in the intervening five years, and so, you naturally expect to pay lower premiums.
The book value of a car is simply its current price in the market, that is, the original price, less depreciation.
Kelley Blue Book Values
While the definition of book value is a general concept with a broadly accepted meaning, specific formulas do exist. In the car industry, pointedly, various definitions of vehicle book value compete side by side. The most well-known ones are the Kelley Blue Book Value and the Edmunds Book Value. Understanding these benchmark book values will help you determine what your truck or other vehicle is worth.
The Kelley Blue Book Value is widely accepted by banks and insurance companies as a measure of a car's actual worth. It is available in three variants:
- Trade-in value
- Private party value
- Certified pre-owned value
Edmunds Book Value
In contrast, the Edmunds Book Value aims to be more comprehensive than the Kelley Blue Book Value. It includes more vehicle conditions, and looks at a greater variety of data points, including:
- private transactions
- depreciation curves for different vehicle types
- Value from dealership sales
Different buyers will tend to value vehicles differently. For example, selling a vehicle to a private individual will, on average, yield a higher price than selling to a dealer. This is because a dealer will have to sell the vehicle onwards to a final buyer. The dealer, therefore, does not pay the full value of the vehicle. Rather, the dealer makes money from the spread between the price they buy at, and the final price they sell for in the market.
Commercial Truck Book Value
Finding book values for a truck is as simple as visiting book value calculation sites to fetch the Kelley Blue Book Value or Edmunds Book Value. For a business with a fleet of trucks, book values are an important accounting consideration. This is because, according to accounting principles, records must indicate the actual worth of assets.
As an example, suppose a new fleet of vehicles has been purchased, and the business estimates the useful life of the vehicles at eight years. To calculate the commercial truck book value of the fleet, the business must amortize the value of the fleet each year. Over eight years, an eighth of the fleet book value is written off each year. At the end of eight years, the book value of the fleet is zero.
The advantage of this sort of calculation is that it makes it easy to forecast when the business will need to shell out money to buy a new fleet of vehicles. By writing down the commercial value of its assets in this way, the business gives a more accurate picture of its true financial situation.
Book Value of Used Mobile Homes
Book values can be calculated not just for trucks, but for a variety of vehicles as well. Mobile homes, RVs, yachts, boats and planes, are some of the vehicles for which book value can be assessed. Mobile homes have book values ranging from just a few hundred dollars to well over a quarter of a million.
Becoming familiar with book values is essential for sound financial knowledge. You can apply this knowledge in any of the following scenarios
- Calculating your net worth
- Applying for a vehicle loan from a bank
- Negotiating the price of a used vehicle
- Applying for and paying insurance on a vehicle