Loan-To-Value (LTV) Ratio: What It Is, How To Calculate It, Examples, And More!
What Is The Loan-To-Value (LTV) Ratio
The Loan-To-Value (LTV) Ratio is a financial ratio that lenders often use to assess the risk associated with a loan. When purchasing a new vehicle, the LTV Ratio is a great way to measure how much money you're borrowing compared to how much a vehicle is worth. Unlike purchasing a home, an appraisal is generally not part of determining the loan-to-value ratio. Lenders typically rely on sites such as Kelly Blue Book to determine the LTV ratio.
Additionally, financing less on a vehicle often leads to a better chance of being approved as well as better loan conditions. Whereas borrowing more can make the very thought of obtaining a loan rather tricky. Therefore, having a lower LTV ratio is always going to be a safer and more affordable option versus a higher LTV ratio.
The LTV ratio is a great way for customers and dealers alike to see how much you're financing with a car loan compared to how much the customer is paying out of pocket. Here is the formula:
LTV Ratio : (Amount Borrowed / Appraised Value) X 100 = Percentage Being Financed
For example, suppose you want to purchase a vehicle for $40,000 with a $6,000 down payment. Here is what the loan to value ratio would look like:
Vehicle Cost: $40,000
Down Payment: $6,000 -----> LTV Ratio : (34,000 / 40,000 ) X 100 = 85%
Loan Amount: $34,000
Ideal Loan-To Value (LTV) Ratio's For Vehicles
A lower LTV ratio indicates financial stability. While a lenders job does involve providing funds to borrowers in exchange for interest, they do not want to loan money to someone who is unfit to pay it back. That said, lenders typically prefer borrowers to borrow no more then 80% or lower. However, this also depends on the borrowers financial situation, goals, and loan officers that are available to the borrower. Here is a more detailed summary of low and high LTV ratio's:
How To Impact Your LTV
Like with any big purchase, a good loan-to-value ratio is important, but when it comes to purchasing a vehicle, there are several factors that come into play. That said, we provided a list of things you'll want to consider for a good LTV ratio:
Down Payment Size: Having a large down payment results in a lower LTV ratio because the more that is brought to the table, the less that you'll need to borrow. Moreover, aiming for a down payment of 20% or more of the vehicles purchase price allows you to keep your LTV ratio below 80%
Credit Score: Having a good credit score not only good for negotiation and interest rates, but it also helps customers secure better financing terms. This can also be true if your LTV ratio is on the higher side. However, a lower credit score could result in unfavorable financing terms, especially if the LTV ratio is on the higher side.
Loan Terms: Having a shorter loan can often come with better interest rates. Though your monthly payment may be higher, having a shorter loan term generally results in a lower LTV ratio due to less being borrowed. If you're still unsure about what your monthly payment, calculating your monthly payment using a car loan calculator can help.
Vehicle Depreciation: Vehicle deprecation refers to the decrease in value that happens to a vehicle overtime due to market conditions, mileage, age, vehicle conditions, and ect. The reason that this is so important when talking about the LTV ratio is because you do not want to be at risk of having or obtaining negative equity. Having a lower LTV also ensures you have more equity, which can help with future purchases in the long run.
