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What is a loan-to-value ratio in an auto loan?

The loan-to-value ratio is the amount of your loan divided by the vehicle’s actual cash value. Lenders use this formula when deciding whether to lend you money for a car or vehicle.

When shopping for a car or vehicle, the loan-to-value (LTV) is one factor that lenders use to evaluate your loan application. The higher the LTV – or the higher percentage of the vehicle’s value that you are borrowing - the riskier a loan is to a lender.

You can lower the LTV, however, by increasing your down payment. This will help to reduce the size of your loan and how much interest you’ll pay over the life of the loan. It may also lower the interest rate a lender offers you.

A loan with a high LTV is risky for you too. An LTV that exceeds the value of the vehicle means you will owe more than the car is worth – likely for a long period during the loan. If your car is stolen or in an accident – or you just want to get a new one, you could have a large amount to pay off before you can purchase a new one.

Example of LTV

If you’re looking at a $20,000 car and need to borrow $20,000 for that vehicle:

$20,000 (loan amount) / $20,000 (amount of the car) x 100 = 100% LTV

If you’re looking at a $20,000 car but have a down payment of $5,000, you will need a loan for $15,000:

$15,000 (loan amount) / $20,000 (amount of the car) x 100 = 75% LTV

Avoiding negative equity

It’s possible that an LTV can exceed 100 percent. If you’re purchasing a car or vehicle but you currently have a loan where you owe more than the car is worth – and you want to roll it over into a new loan for a new vehicle – your loan amount will increase.

If you’re looking at a $20,000 car and have no money available for a down payment, and have $5,000 remaining on any existing car loan, you need to pay off the unpaid balance before getting a new loan. The dealer may offer to roll the unpaid balance into the new loan, which could create another negative equity situation down the road or make it more difficult to get a new loan:

$25,000 (loan amount) / $20,000 (amount of the car) x 100 = 125%

As mentioned above, this higher LTV could impact whether a lender decides to offer you a loan, as well as the terms of a loan and interest rate.

Learn what you can do if you want to trade in a car that’s not paid off

Other factors lenders use when approving your loan

  • Credit score and credit history – This is considered one of the most important factors in determining whether a lender will approve your loan and what rates or terms they’ll provide because it provides insight into how much debt you have and how you’ve managed other credit accounts. Different types of lenders value credit score and credit history more in setting rates than others; some charge the maximum rates regardless, so it is important to shop around. Learn how your credit impacts your interest rate
  • Down payment – Again, by increasing your down payment, you lessen the amount you’ll need to borrow, which reduces the amount you’ll pay over the life of your loan and decreases the risk for the lender.
  • Income – A lender will also generally ask for your monthly income and employment situation to assess your ability to pay back the loan.
  • Debt to Income (DTI) ratio – In addition, a lender will also likely look at how much of your income each month is going to other debts. DTI is calculated based on total monthly bills divided by your pre-tax monthly income.

Learn what things lenders can’t consider when approving your loan

Know before you shop

There are several important financial decisions to make before you shop for a car. Learn what questions to ask so you can make the best choice for you.

What you need to know before you shop for a car or auto loan