Auto Loan-to-Value Ratio Explained

What Is an Auto Loan-to-Value (LTV) Ratio?

When you apply for a new auto loan or a refinance of your existing loan, lenders use the LTV ratio to evaluate the amount you want to borrow relative to the value of the vehicle you're planning to purchase.

Lenders typically set limits for how high your LTV can be. A common ceiling for an auto loan can range from 120% to 125%, but some lenders may go as high as 150%.

After you take out a loan, you can use the LTV formula to determine whether you have positive or negative equity and how much.

How to Calculate Your Auto Loan-to-Value Ratio

The auto loan LTV formula is simple and only includes two variables. Here's how you can calculate it for an upcoming loan application or an existing loan:

1. Find your loan amount. If you're applying for a new loan, this is the amount you're requesting. For an existing loan, you can find this figure by checking your most recent statement or logging in to your account.
2. Find your vehicle value. This is the actual cash value of the vehicle, which may be different from the sales price. You can find this value through websites like Kelley Blue Book and J.D. Power.
3. Divide the loan amount by the vehicle value. Once you have both variables, you can divide the loan by the value to get your LTV.
4. Multiply the result by 100. Doing this will give you the LTV percentage in an easy-to-read form.

Example of Auto LTV

Let's say you're planning to buy a new vehicle, and you expect to roll some of the extra costs, such as sales tax and document fees, into your loan. You're requesting to borrow $25,000, and the vehicle is worth $23,000. Here's how you'd calculate the LTV:

• ($25,000 / $23,000) x 100 = 108.7%

Now, let's say you're thinking about refinancing your existing car loan. Your current loan balance is $15,000, and your vehicle is worth $22,000. If you were to do a straight refinance, here's how you'd calculate the LTV:

• ($15,000 / $22,000) x 100 = 68.2%

However, let's say you wanted to do a cash-out refinance and receive $12,000 in cash. With a new loan balance of $27,000, here's how you'd calculate the LTV:

• ($27,000 / $22,000) x 100 = 122.7%

How LTV Impacts Auto Loans

There are a few different ways LTV can impact your auto loan. Understanding its influence can help you evaluate your options:

• Approval: Lenders typically set a maximum LTV for all borrowers, but they may have a lower limit for you based on your creditworthiness. If your LTV exceeds the maximum allowed, you may not qualify for the loan.
• Interest rate: High-LTV loans tend to be riskier for lenders because lenders are less likely to recoup the amount you owe if the vehicle gets totaled or repossessed. As a result, you can expect a higher interest rate. In contrast, a loan with a lower LTV can help you secure a lower rate.
• Down payment requirement: If your LTV exceeds the lender's limit or you want a lower interest rate, you may need to put more money down on your loan to get approved or secure a lower rate.

What Else Affects Getting Approved for an Auto Loan?

Lenders consider several factors when determining your eligibility for an auto loan, as well as your loan terms. Here are some of the others to keep in mind:

• Credit score: There's no universal minimum credit score requirement for an auto loan, but each lender may set its own minimum. If your application gets denied, you may need to apply with a different lender or work to improve your credit score before applying again.
• Credit history: Your credit score provides a snapshot of your overall credit history, but it doesn't tell the full story.
• Income: Lenders may have a minimum income requirement to ensure that you're able to repay your loan.
• Debt-to-income ratio: In addition to your total monthly income, lenders will also consider your debt-to-income ratio (DTI). This metric is calculated by dividing your gross monthly income by your total monthly debt payments. Auto lenders typically have a maximum DTI ranging from 45% to 50%.
• Vehicle details: Lenders typically set limitations for the types of vehicles they'll finance. For example, you may have a harder time finding a lender to work with you if you're planning to buy a car that's older than 10 years or has more than 100,000 miles. The same is true if the vehicle has a branded title.
• Down payment: Putting money down on your car purchase can help minimize the risk the lender is taking with your auto loan. In some cases, it can even make up for other factors that lenders may view as red flags.

Learn more: How to Get a Car Loan

Evaluate Your Credit Before Applying for an Auto Loan

Before you take out a car loan, it's important to make sure you're prepared. One of the best ways to maximize your savings is to build and maintain a good credit score.

To assess your credit health, register with Experian to get free access to your Experian credit report and FICO^® Score^☉. These resources can show you where you stand and also give you insights into the steps you can take to increase your score. Monitoring your credit regularly can also make it easy to track your progress and quickly address potential problems.