When you need to get auto financing, there are a lot of different factors that go into your approval from a lender. One factor is the loan to value (LTV) ratio, so it’s important that you know how to calculate the approximate value of any used car you’re buying.
Loan to Value Ratio and How to Calculate It
The LTV ratio is always presented in the form of a percentage. Loan value represents a percentage of the value of the vehicle relative to the loan amount. For example, if both the car’s value and the amount you’re borrowing are $50,000, then the LTV ratio is 100%.
Lenders use this number to help them calculate loan risk. Subprime lenders typically don’t approve an LTV ratio that’s over 115% of invoice for a new vehicle, or 115% of book value for a used car for a bad credit borrower, although these thresholds can vary from lender to lender.
It’s important to know the LTV ratio of a used vehicle you’re thinking about financing, because the lower it is, the better off you are. When the LTV ratio exceeds 100%, you have negative equity, and that could lead to issues later in your loan.
To calculate the LTV ratio of a used car, divide its selling price by its book value. Keep in mind that the value of the vehicle you’re looking at could vary depending on the valuation tool used by the lender.
This is because a car’s value can differ between valuation guides such as Kelley Blue Book, NADAguides, and Black Book (the three most commonly used by lenders). The closer the value is to book value, the lower your LTV ratio.
Keeping Your Used Car LTV Ratio Low
As a borrower, you want the lowest LTV ratio possible, because a higher LTV ratio not only means negative equity, it also means you’re likely to see higher interest rates. This is especially true for bad credit borrowers who already get higher interest rates on average.
If you’re looking to lower your loan to value ratio on a used vehicle you’re thinking of buying, there are a few different ways you can do this. The easiest way is to make a large down payment.
A large down payment decreases the amount you have to borrow, and therefore lowers the LTV ratio of your car. This can help you get out of negative equity sooner, and may even lower your interest rate – depending on how much you put down, and the lender you’re working with.
The Bottom Line
Now that you know what a loan to value ratio is and why it’s important, you can begin your search for a vehicle that meets your needs. Remember to look for something reliable that holds its value, and offers the possibility of a low LTV ratio. If you’re not sure where to begin your search for the right car, start here with CarsDirect.
We want to be your source for new cars and used vehicles, and have all the information you’re looking for to make an informed decision. When you’re ready to get a loan, we can point you in the right direction, too. Our nationwide network of special finance dealerships have the lending resources you need when you’re struggling with bad credit.
Don’t hesitate to let us take the hassle out of your car buying experience. Fill out our easy auto loan request form, and we’ll get to work matching you with a dealer in your area.