Your loan-to-value (LTV) ratio is one of the metrics auto lenders use to help them assess the risk of offering you a car loan or auto loan refinancing. You can calculate LTV for your car with this simple formula: LTV = (Loan amount/appraised value of asset) x 100. The result is expressed as a percentage.
The ratio helps lenders compare the size of the loan to the value of the car that secures it. As the size of a loan increases in relation to value, the LTV ratio goes up, which signifies that the lender is taking on more risk. That’s typically something they’re not eager to do.
Calculating LTV yourself can be an important tool to help you determine how easy or how hard it may be for you to secure a loan and whether you might need to make a down payment.
Key Points
• The LTV (loan-to-value) ratio is a financial metric that compares the amount of a car loan to the value of the car.
• To calculate the LTV ratio, divide the loan amount by the car’s value and multiply by 100 to get a percentage.
• To determine the market value of your car, you can use resources like Kelley Blue Book or Edmunds.
• A lower LTV ratio generally indicates a better loan and can affect loan approval, interest rates, and insurance costs.
• Lenders often have maximum LTV ratios, and exceeding these can result in higher interest rates or loan denial.
What Is a Loan-to-Value (LTV) Ratio?
A loan-to-value ratio is a comparison between how much you’re borrowing and the value of the asset that will be used as collateral for that loan. In the case of an auto loan, the LTV compares the amount of the loan and the value of the car that’s securing the loan.
LTV can be used for any secured debt and is a frequent metric for banks deciding whether to offer mortgages to potential homebuyers.
How to Calculate the LTV of Your Car
If you’re interested in calculating an LTV ratio for a car, first divide the amount of the loan by the appraised value of the vehicle. Then multiply the result by 100 to express the LTV as a percentage.
The formula to calculate LTV is: (Loan amount/appraised value of asset) x 100 = LTV
LTV Examples for New Car Buyers
Here’s an example of LTV: You borrow $45,000 from an auto lender to buy a $45,000 car. The LTV in this example would be ($45,000/$45,000) x 100, or 100%.
But perhaps you want to borrow more money than the car is worth — say you add the price protection products like mechanical breakdown protection. In that case, your LTV could be greater than 100%.
For example, if you borrow $47,000 to buy a $45,000 car, your LTV will be ($47,000/$45,000) x 100, or 104.44%.
However, if you’re able to pay for some of the car in cash, you may not need to borrow the full value. In that case, your LTV could be less than 100%. Say you make a $9,000 down payment and borrow $36,000 in auto loan financing to buy a $45,000 car, your LTV would be ($36,000/$45,000) x 100, or 80%.
Using a Combined LTV for More Than One Loan
A combined loan-to-value ratio (CLTV) is a metric most commonly used to measure how much outstanding debt there is against a home, including all liens and loans.
In some cases, a CLTV might be used for auto loans as well. For example, say you’re trying to refinance your auto loan, if you have an old auto loan and a personal loan taken out against the equity you’ve built up in your car, a new lender might use CLTV.
You can calculate CLTV ratios by adding up the total balance of all outstanding loans and dividing by the value of the vehicle.
You can find the value of a new or used vehicle by looking it up in Edmunds or the Kelley Blue Book
What Is a Good LTV Ratio?
Every lender will have its own rules about what LTV ratios are acceptable. But in general, an LTV of more than 115% may make it difficult to acquire a loan on a new vehicle.
Allowable LTVs may be slightly higher when refinancing a car, and lenders may offer loans with LTVs up to 125% for auto refi loans.
Lenders who allow loans over these limits may be stricter on some other requirements, such as asking for a higher credit score or a lower debt-to-income ratio, to offset some of the perceived risk of a higher LTV.
Why Do Lenders Use the LTV Ratio?
When lenders loan out money, they do so with the expectation that the borrower will pay back the loan. However, inevitably some borrowers will default on their loans, saddling the lender with their outstanding debt.
To protect themselves, lenders may require collateral that they can repossess and sell to recoup some of what the borrower owed if the borrower defaults on the loan.
In the case of auto loans, the vehicle itself typically serves as collateral. One might think the ability to sell the repossessed vehicle would cover the lender’s risk, yet this isn’t necessarily the case.
Cars can depreciate in value quickly, and lenders may not be able to cover all of their losses simply by seizing the car. The LTV ratio helps lenders determine how much risk they’re taking on if the borrower accepts the loan but fails to repay the debt.
Higher LTVs vs Lower LTVs
The higher the LTV, the more risk the lender is taking on, and the more money they might lose if the borrower fails to repay the car loan principal and any interest charges that may apply.
For example, if you have an LTV of 110% and you default on the loan, your lender is only going to be able to recoup 100% of the market value of the car at the time of default. At the very least, the extra 10% loan amount on top of the value of your vehicle represents the risk the lender is taking on.
Lenders typically set maximum LTVs in order to limit the amount of risk they expose themselves to.
What Is the Effect of LTV on Interest Rate?
Because a higher LTV means more risk for lenders, they will do what they can to offset that risk. One tactic they may use is charging higher finance charges on your loan. These higher rates mean a larger monthly payment for you, and you’ll pay more for your car over the life of the loan.
Making a larger down payment on a car can minimize your LTV ratio and reduce risk to the lender. You can negotiate for a lower interest rate, and lenders may offer a better rate if you secure a lower LTV.
The potential effect of LTV on interest rates is that lenders may offer a lower annual percentage rate (APR) on a car loan if you reduce your LTV with a larger down payment.
The Takeaway
LTV is an important metric that helps lenders assess their willingness to offer you a loan. But it’s also an important number for you to keep in mind to help ensure you receive the loan that works best for you.
A lower LTV can reduce the cost of refinancing and make it more likely that you’ll be offered a loan that you can afford.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
What is an LTV ratio?
The LTV ratio is a metric that allows lenders to compare the amount of a collateralized loan to the value of the asset that secures the loan.
Why is the LTV ratio important?
The LTV ratio helps lenders determine how much risk they’re taking on—the higher the ratio, the greater the risk.
How do you calculate the LTV ratio for your car?
You can calculate LTV for your car with this simple formula: LTV = (Loan amount/appraised value of asset) x 100. The result is expressed as a percentage.
How do lenders use the LTV ratio?
Lenders look at the LTV ratio to help them determine how much risk they would be taking on if they offered you a secured loan product. They might offset some of that risk by requiring you to have a higher credit score, asking you to make a down payment, or by offering you higher interest rates.
Photo credit: iStock/sonmez
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOALR-Q325-003