If you're thinking about refinancing your vehicle, you might come across the term “LTV” or “loan-to-value”. But what does that mean?
Let’s start with the short answer.
The loan-to-value on a car, often abbreviated to LTV, is the percentage of your car's value that you are borrowing from a new lender, or the percentage of your car’s value that you owe on an existing loan.
If your loan is $30,000 and your car is worth $30,000, your LTV is 100%, because 30,000 is 100% of 30,000.
The loan-to-value ratio, or LTV, is the monetary value of your loan divided by what’s called the “actual cash value,” or ACV, of your car, so you’ll usually see your loan-to-value listed as a percentage.
The higher the percentage goes, the more risk there is for you as an individual and for your lender, so a lower LTV is generally considered better than a high one.
Read on to learn more about the ins and outs of your LTV.
Read on to learn:
How to calculate loan-to-value (LTV)
Determining your vehicle’s actual cash value (ACV)
Why loan-to-value matters
How your down payment affects your LTV
What is considered a good loan-to-value for a car loan
What is considered an underwater loan
To calculate your loan-to-value ratio (LTV), divide the total dollar value of your loan by the actual cash value (ACV) of your vehicle.
For example:
If you owe $16,000 on a car that is valued at $20,000 by the dealer, your loan-to-value ratio is 80%.
16,000 ← owed on loan
÷ 20,000 ← car value
__________
0.80 ← loan-to-value ratio
The tricky part, however, is figuring out your car’s actual cash value in order to do that math.
Many insurers use a proprietary formula when calculating a vehicle’s ACV, which makes things a little tougher for the consumer. But, the good news is, you can get a ballpark range fairly easily.
80% LTV means you owe 80% of the total value of your car to your lender. This is a normal LTV.
125% LTV means you owe 125% of the total value of your car to your lender – more than the vehicle is worth. This is an example of negative equity or an underwater loan.
This can happen when:
you don’t make a downpayment
your car depreciates too fast
you buy a car you can’t afford
you get too many add-ons
you finance a new car by rolling over your old loan into the new loan, carrying a balance from the old loan onto the new one
The easiest way to find out your ACV for the purposes of calculating your approximate LTV is to research your car's make and model and look for cars with similar mileage and histories.
To do this, you can use the Kelly Blue Book, search for cars like yours for sale online, or even visit a local dealership and ask their thoughts.
The basic formula for computing actual cash value is to subtract depreciation from replacement cost, but that is pretty complicated.
Your ACV will almost certainly be less than what you paid. For the most part, a car’s value drops significantly the moment someone drives it off the lot and it goes from new to used. But after that initial drop-off, the value depreciates much slower as the vehicle gets used and experiences regular wear and tear.
The loan-to-value ratio is one of the most important parts of a new car loan because the loan-to-value on your proposed loan will often determine whether or not a lender will be willing to give you the financing you need, and on what terms.
Think about the example of a loan with 100% LTV.
Many lenders wouldn’t move forward with this loan because the LTV is too high, making their risk too high. That’s one of the many reasons most people put down a downpayment when buying a new car: lower the LTV makes you eligible for better loan terms and more likely to receive offers from more lenders.
And the same is true for refinancing a vehicle. After all, the refinance process is basically applying for a new auto loan with another lender. You’re taking out a brand new car loan for the same vehicle and paying off your existing loan with the new loan.
People do this to get a more favorable interest rate or to lower how much they’re paying per month (or both). So when you think about refinancing, you’re really thinking about getting a new loan – which also means that you want a good LTV to appeal to lenders when you want to refinance.
When you get a loan, the lender will typically request an upfront cash payment called a down payment that’s not part of the financing.
The down payment is used to reduce the loan-to-value ratio for your new loan.
Some lenders also ask for an additional downpayment when you refinance.
Even if the lender doesn’t ask, if you have the financial flexibility, you may want to request to add or increase a downpayment in order to help you save more money and pay less (monthly and in the long run).
This is all done because your LTV percent can affect both the interest rate available to you and overall lender options. In fact, some lenders have an LTV ceiling, meaning they won’t lend if the LTV is above a certain percent. Again, the higher the loan-to-value, the more risk the lender has to take on (and you, too!), so it makes sense that a better LTV would give you more and better options for your new loan.
For many loans, increasing the amount of your down payment will likely decrease the total cost of borrowing money for that purchase and may save you some cash in monthly payments.
In general, you want a low LTV. When refinancing a home, you want at least 20% equity in the home, so an 80% LTV or lower. Vehicles are a little trickier, since they depreciate in value over time.
While an LTV less than 80% is ideal, it’s not uncommon to have an LTV around 100% on your existing loan when it comes to car loans. When getting a new loan through refinancing, a high LTV won’t necessarily disqualify you, but depending on the lender, you may be asked to put down a down payment to lower your LTV (and we’ll get into why in just a second).
All that said, the lower the LTV, the better the interest rate you’re likely to get. So a lower LTV is always better for you as the consumer.
A loan is called “underwater” or “upside down” when the LTV is higher than 100% – that is, when you owe more than your vehicle is worth.
Here are some tips to help you get out of such a situation.
Now you know what a loan-to-value is on a car and why it matters.
Understanding how loan-to-value works on an auto loan, whether you’re buying a new car or refinancing your vehicle, is an important part of understanding your eligibility for different loans and the offers available to you.
If you’re looking into refinancing, the team here at Auto Approve will work with you one-on-one through every step in the process – whether that means getting prequalified online or finding an offer tailored just for you.
Get started today by filling out our simple form to get a quote in minutes.