Getting a car loan can be tricky — mostly because lenders have a lot of factors they use to determine if you're worthy. For instance, one of these factors is known as LTV, or the loan-to-value ratio. This ratio compares how much money you need in a loan with how much you're worth, considering all other assets you own. Your LTV will come into play for various items throughout your life, such as getting a mortgage or health care.
The value of a used car loan is the amount of money a lender prefers to lend in a used car transaction. The used car's value is a set amount based on things like age of the car, mileage, and options. The book value doesn’t take into consideration the condition of the specific vehicle you're hoping to finance, but instead looks at a broader picture, and includes such things as your credit history, current financial situation, and other aspects of the transaction.
If you need a car loan, your lender will examine your LTV to determine approval. This means it’s important that you know how vehicle valuations play into your financing options.
How Does LTV Apply for a Car Loan?
What do banks use for car loan value? The LTV for car loans compares how much you need to how much the vehicle is actually worth. So, say you need $24,000 and the car's actual worth is $30,000 — your LTV is 80%.
How does this percentage factor into your loan approval? If your LTV surpasses what your lender is willing to risk, it can impact your financing eligibility. Most loans are made with an exchange of collateral. For instance, if you fail to make your payments or to meet any other loan terms, your lender has the right to confiscate the collateral so its loss isn't as significant. In other words, the lender assumes ownership of the car.
But there are other circumstances that can cause the car's value not to match the amount still owing, such as the case with depreciation. Due to this, most lenders set an absolute top LTV they'll consider when approving loans.
Calculating Your LTV
Calculating the LTV for a car requires just two numbers – how much you need to borrow and how much the car is worth. Divide the loan amount into the vehicle's worth and multiply by 100 to find the LTV percentage. Lenders use this formula in calculating LTV ratios regardless of what your loan is for.
The LTV percentage determines how much risk the lender assumes by offering you a loan. The lower the percentage, the better your chances of getting your car loan. If the LTV is too high, you'll have to make a down payment that lowers the LTV to a percentage your lender is willing to work with.
But – the LTV isn't the only factor in your loan eligibility. Other items lenders take into consideration include:
- Credit score
- Loan term length
- Liquid assets
- Other loans
You can control some of these factors – some of them you can't. Making a sizeable down payment and not asking for more than the car is worth can help manage your LTV, improve your chances of approval, and maybe even help you get a lower interest rate.
Keep Your LTV Low for a Used Car Loan
High LTV ratios mean negative equity and high interest. If your credit isn't prime, you may see higher interest rates regardless of your LTV. The best way to lower your LTV and get approved for your used car loan is to make the largest down payment you can afford. A greater down payment means you don't have to borrow as much, it lowers your LTV, and helps you exit negative equity faster.
Plan for Various Lender LTV Scenarios
Anytime you plan on asking for a loan, you should have some amount to extend as a down payment. Each lender is different regarding their acceptable LTV ratios, meaning you may only qualify for just so much and a sizeable down payment is required. Research lenders in your area to see what kind of sum you need to help secure a loan.
Lenders will tell you what their LTV requirements are and what valuation tools they use to determine your potential vehicle's value, such as Kelley Blue Book or Edmunds. Each vehicle valuation tool has its own valuation metrics and may offer differing values. Ask your lender if they calculate LTV based on a car's retail price or trade-in value and if any other figures are used in the calculation, such as taxes or other fees.
By performing the calculation given above for LTV ratios and pairing it with the information you glean from contacting lenders, you'll see how much you qualify for and which lenders will be more willing to extend you a loan.
How PrivateAuto Can Help
With PrivateAuto, you have access to a huge inventory of used vehicles. And with our new integrated lending feature, you can access financing right within the app.
Armed with your new knowledge of LTV ratios, you can start searching for the car you want that fits your budget. You'll find something reliable that will retain its value. With PrivateAuto, you can shop and sign all from the comfort of home. When you're ready to apply, we'll connect you with our lending partner to get you behind the wheel today. Start by browsing our listings.