Car Loan-to-Value Ratio Explained: Why LTV Matters

The loan-to-value ratio or LTV of a car loan can affect whether your loan is approved and at what interest rate.
Shannon Bradley
By Shannon Bradley 
Edited by Julie Myhre-Nunes

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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.

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%.

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How loan-to-value affects your car loan

Because your car is collateral for the loan, lenders consider whether they could sell the car to recoup losses if you default on the loan. The less you borrow in comparison with the car’s market value, the less risk for the lender and the greater benefit for you.

The loan-to-value ratio affects your loan in several ways, from the rate you receive to whether you’re approved.

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.

LTV and interest rates

Because lenders use LTV to measure the risk associated with your loan, a lower LTV indicates less risk and typically results in a lower loan interest rate, saving you money over the life of the loan.

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.

How a car loan LTV can surpass 100%

Some lenders will let you borrow an amount that exceeds a new car’s manufacturer-suggested retail price (MSRP) or a used car’s market value, meaning you start your loan with negative equity or being upside down on your car loan. In some cases, dealers use a market-adjusted car price even higher than the MSRP, which amounts to even more negative equity to start.

For example, if you borrow $35,000 to buy a $35,000 car, your LTV is 100%. But if you include sales tax, title and license fees in the amount you’re borrowing, that puts your LTV over 100%. Some lenders allow an LTV of 150% or more.

Another common way people end up with a high LTV to start is when they owe more on an existing loan than a car is worth, and they roll the negative equity into the new loan. So, if you’re buying a $35,000 car and owe $5,000 on your previous loan, you could finance the full $40,000 for an LTV of 114%.

The challenges after buying a high-LTV car

In today’s car market, vehicles aren’t losing value as fast, but they normally depreciate quickly. New car values typically decrease more than 20% in the first year after purchase.

If you start with $5,000 worth of negative equity and don’t pay extra to reduce it, that negative equity can grow. A year later, if you want to trade or sell the car and it now has $10,000 worth of negative equity, for example, you would have to pay the $10,000 yourself or roll that amount into another loan.

In another scenario, if your car is totaled in an accident, the auto insurance company would pay only the car’s current estimated value, leaving you responsible for the negative equity amount to pay off the loan.

What to know about loan-to-value when refinancing

If you’re refinancing a car instead of buying a new one, the same rules apply. The lower your LTV, the greater your chance for loan approval and better loan terms.

The biggest difference when refinancing is your car has had more time to lose value, resulting in a higher LTV.

If you now owe more than the car is worth, focus on lowering your LTV to improve your chances of loan approval. That could mean waiting to refinance, so you have time to pay down your current loan. Your lower LTV may enable you to qualify for a lower interest rate and payment, making the time you wait to refinance worthwhile.

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