What is a loan-to-value ratio in an auto loan?
A loan-to-value ratio (LTV) is the total dollar value of your loan divided by the actual cash value (ACV) of your vehicle. It is usually expressed as a percentage. Your down payment reduces the loan to value ratio of your loan.
Your loan terms may be affected by the loan-to-value ratio, because the vehicle is the collateral for the loan, which means that if you default on your loan, the lender can take the vehicle. 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 vehicle is worth.
Your vehicle’s actual value is often lower than what you paid, especially immediately after you purchase a new vehicle. The value of a new vehicle typically goes down sharply when you drive off the lot, and then declines more slowly as you continue to use it.
Increasing the amount of your down payment may decrease the interest rate on your loan.