Loan-To-Value Ratio: What It Is And Why It's Important

A loan-to-value ratio (also known as LTV) is the ratio of a loan amount to the market value of the vehicle (or other asset) that will be purchased with a loan.

LTV is used by lenders to assess risk when you apply for a loan or if you're planning on refinancing your loan. Below, we break down everything you need to know about your LTV:

How To Calculate Your Loan-To-Value Ratio

Calculating your LTV is simple:

• Find your loan balance. This can be found easily by checking your lender's website or loan statement.
• Find the value of your vehicle by using a website such as Kelley Blue Book, Black Book, NADA, or others. (If you're applying for an auto loan or refinance, then the lender will find the actual cash value of your vehicle and LTV with a bookout process. This compares your car in its current condition to the book values your lender uses in order to appraise your vehicle's value, which is then used to calculate your LTV and determine your loan rates.)
• Divide your loan balance by your vehicle's value, then multiply that number by 100 to get the percentage.

Example: If you borrow $25,000 to purchase a $25,000 car, then your LTV would be 100% (or $25,000/$25,000 = 100).

Why Your LTV Is Important

Along with your creditworthiness and debt-to-income ratio, lenders use your LTV to determine how much of a risk it will be to lend to you: specifically, whether you qualify for a loan and what rates you receive.

An LTV lower than 100% is considered positive equity, which means the value of your vehicle is more than your loan. If your loan is greater, then you have negative equity, meaning you owe more on the loan than the value of your car and you will be considered to be upside down on your loan.

Additionally, the value of your vehicle can fluctuate since it generally depreciates over time (sometimes over 20% in the first year of ownership if it's brand new), with use and added mileage, and/or if it's been in an accident. With that change in value, your LTV can change and it can become difficult to refinance your auto loan. Higher LTV means a higher risk to your lender and higher interest rates for you.

If you're looking for an auto loan or auto loan refinancing, lenders will want some assurance that you will not default on the loan. Generally, your vehicle will be used as collateral so lenders can sell your asset and recoup the lost amount.

So what's a good LTV? Although an LTV over 100% means you owe more on your loan than the value of your car, you can still get approved for a refinance. From 2015 to 2019, 90% of applicants with LTVs below 123% were approved.

A few lenders in the industry may approve vehicles with high LTVs, but they usually take other factors (credit score, debt-to-income ratio, etc) into account.

Lowering Your Loan-To-Value Ratio

To have a better chance of qualifying for an auto refinance loan or receiving better terms, lowering your LTV is the best way to go.

The easiest way to achieve this is to pay down your existing loan or -- if you are applying for an auto loan -- pay a larger down payment to reduce the amount you need to borrow or purchase an older vehicle.

How do I calculate my vehicle's LTV?

First, you'll have to look up its value through a site that banks use (such as Kelley Blue Book, Black Book, NADA, etc) and then determine its loan, trade, or retail value. Multiply its value by the LTV percentage to find the amount your bank will loan on the vehicle.

What does LTV mean?

The LTV for your auto loan is a percentage shown by the ratio of your loan amount to the market value of your vehicle. For example, if you borrow the $25,000 to buy a $25,000 car, your LVT will be 100% ($25,000/$25,000 = 100%).

What is a good LTV for a car loan?

An LTV below 100% means you owe less on the loan than what your vehicle is worth, which is considered positive by lenders. The higher the LTV, the harder it is to qualify for a refinanced loan.