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A car’s loan-to-value ratio, or LTV, is the amount you want to borrow divided by the value of the car you want to buy.
Because auto loans are secured and your vehicle serves as collateral, the LTV helps lenders measure how much risk they are taking when approving your loan.
So, if you’re borrowing $30,000 to finance a car valued at $35,000, the LTV would be 86%.
Buying a car is exciting! But financing that car purchase can get complicated quickly One of the key factors lenders evaluate is something called loan to value ratio, or LTV I didn’t know anything about LTV when I bought my first car. By understanding this auto loan term, you can improve your chances of getting approved and score the best interest rate.
What is Loan to Value Ratio?
Loan to value ratio compares the amount you borrow to buy a car to the vehicle’s value. To calculate LTV, you divide the loan amount by the car’s value
For example, if you borrow $20,000 for a car worth $25,000, the LTV is 80% ($20,000 ÷ $25,000 x 100). The lower the percentage, the less risk for the lender.
Lenders use LTV to measure the risk of lending to you. If you default on the loan, the lender needs to be able to repossess and sell your car to recoup losses. The higher the car’s resale value compared to the loan balance, the lower the lender’s risk.
Why LTV Matters for Your Auto Loan
Your loan to value ratio affects your chances of approval and the loan terms like interest rate. Here’s how:
Loan Approval
- Lenders have LTV limits for loan approval, commonly 100-150%.
- LTV above their ceiling means denial.
- LTV is one factor lenders evaluate with credit scores, income, etc.
Interest Rates
- Lower LTV signals less risk so lenders offer lower rates.
- Borrowing 80% of a car’s value may earn you a 3% rate.
- Borrowing 120% may mean you pay 8% interest.
Down Payment Needed
- High LTV may require a larger down payment from you.
- This lowers the LTV to improve your approval odds.
When LTV Exceeds 100%
In some cases, you may end up with an LTV over 100%:
- You roll negative equity from a previous car loan into the new loan.
- The dealer inflates the price above MSRP increasing your loan amount.
- You finance extra fees like sales tax and extended warranties.
Starting with an LTV over 100% is risky. That negative equity grows as the car depreciates. Here are two scenarios:
Trading In or Selling
- If you owe $15,000 on a car now worth $10,000, your LTV is 150%.
- To trade it in, you’d need to pay the $5,000 difference yourself.
Total Loss in Accident
- If the car is totaled and worth $10,000 but you owe $15,000, insurance only pays the current value.
- You’re responsible for the $5,000 negative equity balance.
Refinancing Considerations for LTV
When you refinance a car loan, lenders will calculate LTV and use it to evaluate your application.
Here are some tips for refinancing high LTV auto loans:
- Your LTV is likely higher than when you first financed the car since used cars depreciate quickly.
- Focus on lowering your LTV before applying to improve approval odds.
- Paying down your balance before refinancing lowers your LTV.
- Waiting and making payments can help if you have negative equity.
- A lower LTV may qualify you for a lower interest rate on the refi.
How to Calculate Your Auto Loan’s LTV
Figuring your own LTV when car shopping is easy. Follow these steps:
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Loan amount – Note the loan amount you need.
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Car value – Check car valuation sites like Kelley Blue Book for the car’s worth. Use the retail “good” condition value.
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Divide and multiply – Divide the loan amount by the car’s value and multiply by 100.
You can also use an online loan to value calculator to do the math for you.
Tips for Improving Your Car Loan LTV
To get the best loan terms, you want to decrease your LTV before applying. Here are some tips:
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Make a larger down payment – This lowers the amount you have to borrow to buy the car.
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Shorten loan term – Opt for a 36-month instead of 60-month loan. You’ll pay less interest and the payment lowers LTV.
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Buy a cheaper car – Consider lower-priced vehicles to decrease the loan amount.
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Pay down existing car loan – If you have negative equity, pay extra before trading in to lower LTV.
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Wait to buy – Give yourself time to improve credit and save for a larger down payment.
The Takeaway on LTV and Auto Loans
The loan to value ratio is an important metric lenders use to measure risk when financing a car purchase. A lower LTV improves your chances of approval and can help you qualify for better interest rates.
Understanding LTV allows you to shop for vehicles and structure your deal to get the best auto financing. With some wise moves like a larger down payment, you may be able to lower your LTV and score an affordable monthly car payment.
LTV and down payment amount
Putting money down on a car loan will reduce your LTV, so if you have a very high LTV, a lender may ask for more of a down payment. The positive aspect of putting more down is that it can improve your chances of loan approval and getting a lower interest rate. You might also be able to afford a shorter loan term with a higher down payment.
LTV and auto loan approval
To limit their risk, lenders have LTV ceilings for loan approval. These differ from lender to lender but are commonly in the range of 100% to 150%. LTV can affect your ability to get financing if it surpasses the lender’s limits, but LTV is just one of many factors — including credit scores and history of on-time loan payments — considered by lenders when approving a loan.
Loan to Value Ratio “LTV” Explained
FAQ
What is a good LTV for car loan?
What does 125% LTV mean?
What is an acceptable loan-to-value ratio?
What is a good DTI ratio for auto loan?
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Debt-to-income ratio
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Rating
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0% to 36%
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Ideal
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37% to 42%
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Acceptable
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43% to 45%
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Qualification limits for many lenders
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50% and above
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Poor
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How do you calculate car loan-to-value ratio?
You calculate it by dividing the loan amount by the car’s value (which may differ from the sale price) and multiplying the result by 100 to get a percentage. For example: if you take out a $25,000 car loan to buy a $30,000 car, your loan-to-value ratio would be 83%.
What is a car loan-to-value ratio (LTV)?
Here is a list of our partners and here’s how we make money. A car’s loan-to-value ratio, or LTV, is the amount you want to borrow divided by the value of the car you want to buy. Because auto loans are secured and your vehicle serves as collateral, the LTV helps lenders measure how much risk they are taking when approving your loan.
How do you calculate loan-to-value ratio?
You can use this formula to figure your loan-to-value ratio: Loan amount ÷ car value X 100 = LTV So, if you’re borrowing $30,000 to finance a car valued at $35,000, the LTV would be 86%. Looking to finance or purchase a car? Explore options for auto loans, car shopping, and lease buyout.
Why do Lenders look at loan-to-value ratio when buying a car?
Lenders look at the loan-to-value ratio at the time of the car purchase as a benchmark to make sure they aren’t taking on unnecessary risk. This ratio concerns lenders because the car acts as collateral if you default on the auto loan. The lender can repossess the car to get some of their money back.