Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) is a financial metric that compares the amount borrowed on a loan to the appraised value or purchase price of the vehicle, whichever is lower. Expressed as a percentage, LTV is used by lenders to assess risk and determine loan terms.
A lower LTV indicates that the borrower has more equity in the vehicle, typically through a larger down payment, which lowers lender risk. Higher LTV ratios suggest that the borrower is financing most of the vehicle’s value, which can lead to less favorable loan conditions or higher interest rates.
Lenders often set maximum LTV limits, such as 80% or 90%, depending on credit score and vehicle type. For example, borrowers with excellent credit may qualify for loans with 100% or even 110% LTV, covering the full purchase price plus fees like taxes and registration.
However, high LTV loans increase the risk of negative equity, especially since cars depreciate quickly in the first years. Managing LTV carefully is crucial for buyers to avoid owing more than the car is worth, particularly in the event of an accident or early sale.
LTV is a key factor in both loan approval and insurance considerations.
Formula
LTV = (Loan Amount ÷ Vehicle Value) × 100Example
Mike wants to buy a $25,000 car and puts down $5,000. He borrows the remaining $20,000. His LTV ratio is 80% ($20,000 ÷ $25,000). Because of his lower LTV, he secures a lower interest rate from the lender.