Why is the value of my car higher than my loan?

[sethmachine]

I recently purchased a used car instead of re-leasing again.

The total cost of the car was about $10,000. I could have bought it in cash. I decided to finance it instead, as I figure having $10K more in my bank now will be more useful if I need to purchase a house or apartment in the near future for the 20% down payment. The loan is at 3.19% interest rate for 60 months (5 years). I couldn't get a better rate because my credit utilization has been too high (been using 0% APR credit cards). There was a 3 year option but the interest would drop to just 3.00%. Not a big difference, considering I plan to keep the car for hopefully 10 years.

On the loan documents I signed, the bank lists the collateral, which is the vehicle. I am guessing in the event the loan is delinquent, they will attempt to recover their cost by possessing the car.

The value of the collateral is a fair bit higher than the loan. It is listed at around $13,000.

Does this mean the bank thinks that is how much the asset would be worth, if they sold it? Or was that just to indicate the loan-to-value ratio, and hence a less risky loan?

[TexasHusker]

Banks want collateral value to be HIGHER than the loan so that they hopefully do not take a loss if and when you default.

Generally banks want to finance no more than 80 percent of collateral value of anything. A few will go higher.

[siggy_freud]

Does this mean the bank thinks that is how much the asset would be worth, if they sold it? Or was that just to indicate the loan-to-value ratio, and hence a less risky loan?

Essentially, yes. What if you never made a payment on the loan? If your car is worth less than what they loaned, they'd be in the red financially. They're protecting their assets by loaning you 10k on something they feel is worth 13k. Now, that doesn't necessarily mean your car is actually worth 13k. The bank just thinks it is, meaning one guy/gal looked it up on NADA and/or KBB.