A loan-to-value ratio, or LTV, is an important calculation lenders use to determine auto loan eligibility. The lower your LTV, the higher your chance of getting approved for a loan. This ratio shows the loan amount compared to the actual cash value of a vehicle in the form of an equation.
Here's a breakdown of what your LTV can tell you, how it's calculated, and what yours means.
LTV is determined by dividing the total amount of your loan by the value of the car. If the car you're thinking about buying is priced at $30,000 and you're borrowing all 30k, your LTV is 100%. As we mentioned, the lower your LTV, the better, which means you can change your LTV by borrowing less. To do this, you have to provide a down payment or trade-in, which can act as cash.
To calculate your loan-to-value ratio, you simply take your loan amount and divide it by the value of the car.
Here are a few examples using the $30,000 vehicle we mentioned above:
LTV matters for a car loan because it gives the lender important information about the risk they are taking to give you a loan. The higher the LTV, the more inherently risky the loan. An LTV can be higher than 100% when things like upside-down loans are rolled into a new loan, and this means a higher risk of negative equity on your new loan.
Since lenders like to see you invest in your own success, they prefer you to have an LTV of 80% or less as a general rule of thumb. This is in line with the typical 20% down payment that dealers like to see. However, this can all depend on your credit score. If you have stellar credit and have handled auto loans well in the past, a lender may not think twice about lending you up to 100% of the loan.
Your LTV can surpass 100% when you add other things to it, like negative equity from an old loan. If you continually do this, you can get farther and farther into debt. It's never a good idea to borrow more than can be repaid with the value of the vehicle, though sometimes it's necessary.
Sometimes you need to go with a higher LTV loan, especially if you need a vehicle fast and don't have very much to use as a down payment. Loans with a higher LTV often come with a higher interest rate, though, so you have to weigh your pros and cons carefully.
| High LTV Pros | Low LTV Pros | High LTV Cons | Low LTV Cons |
| Faster loan access | Lower interest rates | High interest rates | Higher upfront costs |
| Lower upfront cost | Lower monthly payments | High risk of negative equity | Possible choice limits |
| Can finance extras | Better ease of resale | Harder to refinance | |
| Less negative equity | Stricter loan terms | ||
| Better approval odds |
Typically, there are more benefits to getting a lower LTV loan, such as a lower interest rate, less of chance for negative equity, and better trade-in value.
A lower loan-to-value ratio typically makes it easier to get approved for a loan or get approved at a lower interest rate. This is because borrowers with a lower LTV usually have some skin in the game and have made a substantial down payment of at least 20% or more. Remember, the less you borrow, and the better your credit, the lower your interest rate has the potential to be.
When the value of your vehicle is worth less than you owe on its loan, you're in a negative equity situation, and your LTV will be over 100%. For example, if you didn't make a large down payment, only putting down $3,000, you borrowed $27,000. However, current market conditions now value your vehicle at only $20,000. So, to find your LTV, the equation is: ($27,000/$20,000)*100 = 135%.
Since you're in a negative equity situation with an LTV over 100%, it may be harder to trade in your vehicle or to refinance. Most lenders will take on some amount of risk with a negative equity loan; however, the standard cut-off is usually 125%. So, in our example, you'd still be over the threshold for trading in and rolling your negative equity into another loan.
When it comes to refinancing, if your LTV is under 100%, you're typically in a good spot. However, like we mentioned earlier, if your LTV is over 100%, you're likely to have more difficulty getting approved for refinancing.
To offset the risks of refinancing someone with a higher LTV, lenders typically require a down payment to bridge the gap between vehicle value and what you owe on the loan, or you may need a cosigner to help mitigate the risk in a lender's mind.
Remember, the Lower the LTV, the better the position you're in, whether you're financing for the first time or refinancing your loan.
Senior Automotive Financing Editor
Meghan is expertly versed in automotive special financing and pricing analysis, having published hundreds of articles on Auto Credit Express and its sister sites, CarsDirect, and The Car Connection over the past decade. She began her career as a sports writer for the local newspaper in her hometown nearly 30 years ago, and has enjoyed writing ever since. Read more
Get the latest credit tips, resources and advice delivered straight to your inbox.
