If you're thinking about refinancing your vehicle, you might come across the term “LTV” or “loan-to-value”.
The loan to value ratio is one of the most important parts of a new car loan – or refinance. 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, paying off your existing loan with the new loan, and lowering or stopping your existing monthly payment. 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.
All that out of the way, let’s talk about LTV.
Loan-to-value is a concept many people don't grasp, but understanding your LTV and how it affects your loan or refinance is crucial if you want to avoid any surprises when getting into debt for your new, or not so new, car. And the same applies for your truck, SUV, or, yes – even motorcycle.
So, what exactly is a loan to value on a car? Lucky for you, we’re here to help.
The LTV is, essentially, the percentage of your car's value that you are borrowing from a lender. For example, if your loan is $30,000 and your car is worth $30,000, your LTV is 100%.
In short, 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 better than a high one.
To calculate your loan-to-value ratio (LTV), divide the total dollar value of your loan by the ACV – again, that’s the ‘actual cash value’ – of your vehicle.
So, hypothetically, if you owed $16,000 on a car that is valued at $20,000 by the dealer, your loan-to-value ratio would be 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.
First, 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 basic formula for computing actual cash value is to subtract depreciation from replacement cost, but that is pretty complicated. The easiest way to find out your ACV for the purposes of calculating your approximate LTV? Simply 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.
Pro tip: Try looking up the Kelly Blue Book or NADA guides for your exact model of vehicle, then compare it with what you owe on the loan. If this number seems high, it might be time to refinance!
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.
Yes, it certainly can. This is because lenders take your loan to value ratio into account when deciding how much they are willing to lend you and at what rate. Your total amount owed on any type of loan, including car loans and mortgages, should be lower than the market value of the vehicle or home you want to finance.
In general, a higher loan-to-value ratio translates to a higher interest rate.
With some loans, the lender will request a down payment when you refinance. This down payment is used to reduce the loan to value ratio for your new loan. In other cases, even if the lender doesn’t ask, if you have the financial flexibility, you may want to add or increase a downpayment in order to help you save more money and pay less – both 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 could even save you some cash in monthly payments!
Now you know what a loan to value is on a car and why it matters. We hope you found this article enlightening.
While we have you, if you’re researching LTVs because you’ve been thinking about refinancing your vehicle loan, we can help!
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.