When purchasing a vehicle, lenders often use the Loan-to-Value (LTV) ratio to assess the loan amount relative to the vehicle's value. Some lenders are willing to lend up to 150% or more of the vehicle's value. This means they provide financing that exceeds the vehicle's worth, potentially covering additional costs like taxes, upgrades, or warranties.
The LTV ratio, combined with the customer's credit rating, helps lenders evaluate the risk associated with the loan. A higher LTV ratio may indicate higher risk, potentially resulting in a higher interest rate for the borrower. Conversely, a lower LTV ratio might lead to more favorable interest rates, reflecting lower risk for the lender.
LTV Example
- If your vehicle you are looking at has a value or purchase price of $30,000, then lets take a closer look at the calculation for LTV:
$30,000 (total loan amount) / $30,000 (total value of the car) x 100 = 100% LTV
- If you then choose to put a down payment for the vehicle to lower your loan amount, then your LTV will decrease. If the vehicle is $30,000 and you put down a $5,000 payment upon purchase of the vehicle, then the loan will only need to be $25,000. Using the same calculation as above, the new LTV is as follows:
$25,000 (loan amount) / $30,000 (amount of the car) x 100 = 83% LTV
Negative Equity
It’s possible that an LTV can exceed 100 percent as stated above in this article. Most lenders typcially lend above 100% up to even 150% or more depending on the Buyer, Buyers credit, vehicle, etc. For instance, if you buy a vehicle worth $30,000 say you want to add a lift kit, tires, wheels, tinted windows, & a bed cover, that would cost you an extra $4k-$5k. That added expense would be required to be paid out of pocket in cash or put on a credit card on a high interest rate. Alternatively, you could also look at rolling that extra $4k-$5k into the vehicle loan at a much lower interest rate and not have to pay cash upfront for those expenses. In that scenario, the new LTV calculation would be:
$35,000 ($30,000 + $5,000 in upgrades for total loan amount) / $30,000 (value of the car) x 100 = 117% LTV
What factors do Lenders look for?
- Credit score and credit history – This is one of the biggest factors Lenders look at. It is important to make your payments on time and not leverage yourself with too much debt to keep a high credit score.
- Down payment – The larger the down payment, the less risk to the lender for losing any money if things go south.
- Income – Lender needs to verify you make enough money each month to make the vehicle payment
- Debt to Income (DTI) ratio – This is an important one as banks will look at your other debt obligations such as your current home mortgage, other auto payments, etc. to ensure you have enough cash to make the payment each month.