What Is Loan to Value? All You Need To Know
What Is Loan to Value? All You Need To Know
Posted on February 10, 2023
When you’re researching auto loans, you will often come across the term ‘loan to value’. It’s used in every auto loan application and can influence whether you’re accepted for the loan or not. So, what is loan to value and what can you do about it?
We asked our auto loan team to explain.
What is Loan to Value?
Loan to value is something you’ll hear a lot of when discussing loans. It is relevant to auto loans, mortgages and any type of secured personal loan.
The loan to value ratio is a measure of how much of the asset you’re buying is being financed. The loan amount to the value of the asset being purchased. It’s used to assess risk.
For example, you’re looking to buy a car for $35,000 with a $35,000 car loan. Your loan to value, LTV, is 100%. If you buy a $40,000 car with a $20,000 loan, your LTV would be 50%.
Why is Loan to Value Ratio Important?
Auto loan to value ratio is important because it can influence whether you’re accepted for the loan or not.
Lenders like down payments because it insulates them from loss if you default on the loan. The higher the LTV, the higher the perceived risk of loss if you don’t pay the loan back.
This can result in the loan being refused or paying a higher interest rate if you’re accepted.
Lenders typically like as little exposure as possible. The lower the gap between the amount being borrowed and the resale value of the car, the happier the lender will be.
Down Payments are Also Important
We always recommend using a down payment with any auto loan. It not only helps you by lowering the overall amount borrowed but it also reassures the lender that their risk is lower.
If you default on an auto loan and have put $10,000 down, the lender knows that should you default, they can repossess the car, sell it and recoup most of the original loan value. That can make a huge difference to their decision to lend.
Lending is all about risk. The lower the risk you represent. The higher your chance of being accepted for the loan. A down payment or a low loan to value are two ways you can lower that risk.
Higher Loan to Value
Despite what we just said about keeping the value of the car and loan to value similar, some lenders will offer more than 100% LTV.
For example, you’re buying a car for $30,000 and want to pay off other debts worth $3,000. Your total loan is $33,000, which is 110% LTV.
If your credit score is high enough and you have a good payment history, many lenders will offer that kind of loan and assume that 10% risk. You may pay a higher rate of interest to insulate the lender a little but these types of loans are possible.
In fact, we sometimes recommend this method to consolidate other borrowing so you have a single monthly payment instead of several smaller payments.
Loan to value, LTV is an important consideration when thinking about auto loans. The lower the LTV, the higher your chance of a loan. The higher your credit score, the higher the chance of a higher LTV.
We will use all our skill and experience to deliver the lowest possible car loan rates, guaranteed. Contact Car Nation Canada Direct to learn how we can help.