Whether you’re in the car buying process, looking to get an auto loan or want to refinance your current auto loan, one factor that goes into a lender’s approval is your vehicle’s loan-to-value (LTV) ratio.
You can calculate your car loan’s LTV with a simple formula, but you’ll need to determine the car’s value first.
So let’s look at how LTV works for cars, how to calculate it and what it means for your auto loan. We’ll also give you a few tips to help you determine your car’s value.
What Does Loan-to-Value Mean for a Car?
Loan-to-value (LTV) ratio for a car measures your auto loan balance compared to the value of the car. When lenders look at your loan application, they’ll calculate the LTV to assess the risk they would take if they loaned you money. They want to ensure the loan amount won’t be much higher than the car’s value.
Calculating the LTV on your own before you apply for loans can help you determine which loans you may qualify for.
How Do You Calculate LTV?
LTV is expressed as a percentage and can be calculated using a simple formula:
LTV = (loan amount / car value) X 100
If you want to buy a $5,000 car and need a $4,000 loan, the LTV is calculated like this:
LTV = ($4,000 / $5,000) X 100 = 80%
In this case, the LTV is 80%.
How Does LTV Affect Auto Loans?
Lenders use LTV to assess loan risk, loan terms and loan approval. These are some of the loan aspects that are affected by LTV:
- Ideal LTV percentages: Every lender will have their own LTV limit – which is the highest LTV they’re willing to risk to give you a loan. For one lender, it could be 75%. For another lender, it could be close to 100%. Check with the lender to learn what their LTV limit is.
- Approval odds: The lower your LTV, the better your chances of being approved for an auto loan and getting better loan terms. Lenders will also look at your income and creditworthiness during the approval process. So you can’t bank on a low LTV to get your loan approved.
- Interest rates: The lower your LTV, the better your interest rates will likely be. But remember, factors like your income and credit scores will also determine your interest rates. A low LTV won’t always translate into lower interest rates if you have bad credit scores.
- Negative equity: An LTV of 100% or more (meaning you’re borrowing the same amount or more than what the car is worth) means you have negative equity in your car. This can cause you to go upside down on your loan if the value of your car experiences depreciation faster than you can pay off your loan.
Loan-to-value and refinancing an auto loan
Waiting for the right time to refinance your auto loan is crucial to getting the best deal. And LTV will play a key role in what a lender offers you.
If time has passed since you got your original loan, your car has likely lost some of its value. Your LTV may be higher than when you bought the car if you owe more on your loan than the current car valuation.
If you wait too long to refinance, your car may lose too much value compared to what you still owe on your loan, and you may not qualify for refinancing.
3 Tips for Determining Used Car Value
There are a few easy ways to determine your used vehicle value. Figuring out your car’s value will give you a better idea of your LTV when it comes time to get a loan or refinance. Let’s take a look:
1. Use car value guides
Use value guides like Kelley Blue Book, NADA, Black Book or Edmunds to get an accurate estimate of the car’s value. It’s good to visit each website because the car’s value may differ slightly between them. Ask your lender which guides they prefer so you can get a better idea of what value they’ll be using in their LTV calculations.
2. Understand different car values
You should also ask the lender which car value they will use to calculate the LTV – trade-in value, book value, loan value or retail value – to know which numbers to use in your calculations.
If you’re not purchasing a car through a dealership, the private seller’s car price (or private party value) may be taken into account when calculating LTV.
3. Note the car’s condition
A car’s condition (fair, good or excellent) can impact LTV and loan approval. Most value guide websites will ask you to describe a car’s condition to receive a value estimate. Defining your car’s condition can be a tricky thing to do, but it’s best to be realistic. Not every car can check off the “excellent condition” box. You’ll also need to know:
- Engine size and type
- Additional features or packages (like a sound system, heated seats, luxury or sports model, etc.)
While a car may be in good condition, high mileage or old age may reduce its value compared to a car that’s in good condition, has lower mileage or is newer.
A Little Math Goes a Long Way
Determining a car’s value can help you calculate your LTV to see if you’ll qualify for an auto loan or an auto loan refinance.
Using car value guides, understanding which value the lender will use to calculate LTV and being realistic about the car’s condition can help you get a better estimate of the value of the vehicle.
Lenders will choose an LTV limit that determines whether you qualify for an auto loan or not. Having an LTV lower than 100% can increase your approval odds, but the lower the better.