When a lender approves your loan, it will also give you a loan to value (LTV) percentage that might be 80%, 100%, 125% or even more. This is the maximum size of your loan compared to the value of the car you're buying. Different lenders have different ways of determining a car's value:
- For new cars, it's usually the invoice price or MSRP.
- It's often the wholesale or trade-in price of a used car.
Let's say you're buying a new car and have an LTV of 125% based on MSRP. In this case, you won't have to make a down payment unless you want to; and the extra 25% provides the flexibility to finance negative equity, tax, registration and other fees.
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Your LTV may not be as generous if you have a bad credit score. Let's assume you're buying a used car and your loan has an LTV of 100%. The key difference here is that LTV is based on wholesale pricing and not the price you negotiate—if the car you're buying has a wholesale price of $17,500, your loan can be no larger than that. So if you've negotiated a retail price of $20,000, you'll need to make a down payment that includes the $2,500 difference plus taxes, registration and other fees.
These are only hypothetical situations, of course, but they can help you understand how LTVs affect your purchasing power.
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