Loan to Value Percentage: Knowing How LTV Impacts Your Auto Loans

Trying to obtain an auto loan can be a tricky process, mainly because loan companies have many factors that determine if they're willing to lend you money. One such factor is your LTV (loan to value) ratio, which compares the amount you want for a loan with the value of your assets. LTV is a value that comes into play in various credits, such as mortgages and care.

What does LTV mean for car loans?

As mentioned, the LTV compares the amount of your loan to the actual value of what you're getting a loan for—in this case, we'll be discussing cars. Whenever talking about the LTV, it's a percentage. For example, if your loan amount is $90,000 and the value of your vehicle is $100,000, then your LTV is ninety percent.

So how does the LTV ratio play into getting a car loan? It can actually impact your eligibility for financing, especially if the LTV value surpasses what a lending company is willing to risk. And it does ultimately come down to financial risks.

Whenever you make certain types of loans, collateral is involved if you default on your payments or can't make your payments on time. If you fail to meet the terms of the loan, the lending agency will take back its collateral so that it doesn't take a significant loss. In the case of auto loans, insurance is generally the car itself.

However, many circumstances can lead to the value of the car not matching up to the amount you still owe on your loan. The vehicle may depreciate, or perhaps you need additional money to pay for negative equity or debt on a previous car loan. In any event, it's possible for the LTV to come out to more than one-hundred percent.

If you take out more in a loan than the agency can have in collateral, then the company is taking a significant risk if it approves your loan. To decrease the amount of risk for their end of the bargain, most loan agencies set a limit on what LTV ratio they'll allow. If the amount you need to borrow exceeds the company's LTV, you likely won't receive approval for your loan when purchasing a car.

Ways to Reduce LTV Ratio

Because you want to look reliable as a borrower, having a lower LTV ratio is in your best interest. One of the best ways to drop this percentage is to make a more significant down payment when you go to purchase your car since you'll need to borrow less to pay for your vehicle.

This strategy is also helpful because it means you'll owe less and pay less interest over time. A twenty percent down payment at minimum is the recommended amount.

Other than that, your LTV ratio will decrease as you make your scheduled payments since the amount of money you owe will go down. Since the value of a car depreciates quickly over time, a higher LTV can mean you'll spend more money on the vehicle than it's worth in the end.

Calculating LTV and Its Use for Lenders

If you want to calculate the potential LTV for a vehicle, you only need two numbers: the amount you wish to borrow and the actual value of the car you want to purchase. Dividing the loan amount over the worth then multiplying by one-hundred will give you your LTV percentage. Lenders will calculate the LTV ratio in the same way. This calculation is the same for all brands, from GMC to Ram trucks.

Again, the LTV will determine how much of a risk there is for the lender giving you a loan for your vehicle, and they will check what you're asking for against the value of the car. If the ratio is too high, that lender likely won't approve your loan unless you make a down payment to offset the amount.

Since LTV thresholds can vary between different banks and lenders, researching in advance can help you increase your chances of getting a loan (and decrease the negative impact on your credit that can happen if you apply and a lender declines).

It's also essential to remember that your LTV ratio isn't the only thing that lenders use to determine your eligibility for a loan. Other factors include:

  • Your credit score and history
  • Income and expenses
  • The loan term
  • Your liquid assets
  • If you've had previous bankruptcies or foreclosures
  • Other recent loan applications

Some of these factors you can directly control and others you cannot. Making a down payment and not attempting to borrow more than the value of the car will help you manage the LTV ratio, which can increase your chances of getting your loan approved or getting a lower interest rate so that you don't pay more in the long term.

Planning for Bank's LTV Percentages

While you should always aim to have a down payment before taking out a car loan, the LTV percentage for a bank may mean you can only get so much in the financing stage, and a down payment then becomes a requirement. To get an idea of how much you should prepare for a down payment, you should research what different lenders have to offer.

If you contact a financial institution, you can learn what their LTV percentage is, as well as what resource it uses to determine the value of your vehicle (Kelley Blue Book, NADA, and Black Book can sometimes have different numbers for new car prices). You'll also want to learn if the lender calculates LTV with the car's retail, loan, or trade-in value and if they include any other numbers like the tax in determining the percentage.

By multiplying the vehicle value by the LTV percentage, you can see how much that institution will likely be willing to lend you, which can be helpful when considering new car prices. Even if you don't get the exact number, you can put yourself in the best possible position to get approval for your loan