What is a loan-to-value ratio? How is it calculated? How does that impact my financing?
A loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your car. It is usually expressed as a percentage.
Your loan terms may be affected by the loan-to-value ratio, because the car is the collateral for the loan, which means that if you default on your loan, the lender can take the car. The lender may seek a down payment to reduce the size of the loan and make it less likely that the amount you owe on the loan will be more than the car is worth.
Your car’s actual value is often lower than what you paid, especially immediately after you purchase a new car. The value of a new car typically goes down sharply when you drive off the lot, and then declines more slowly as you continue to use it.
TIP: Increasing the amount of your down payment may decrease the interest rate on your loan.