What Is Loan to Value Ratio and How it Affects Your Loan

The vocabulary of financial lenders, no doubt, confuses a lot of people, and this might be one of the reasons people are cautious when dealing with them. An unknown vocabulary when your money is at stake? You walk out the door. When applying for a car loan also, this happens, and the annoying thing is that you hear a whole new set of vocabs.

In this article, we’ll touch on issues you might have with a loan to value ratios. The following will also be answered:

1. Why lenders calculate the loan to value ratio.
2. How down payments affect
3. the loan to value ratio.
4. Before getting to that, let’s explain what the loan to value ratio stands for

Loan to value ratio (LTV), in its purest form, is a measure of risk. It shows a lender how risky it is to lend to you and helps them know if they should take on that risk. It is proof of how much of the loan is tangible to the lenders.

Your loan amount divided by the car’s value expressed as a percentage is how the loan to value ratio is calculated. Therefore, applying for a $30,000 loan to purchase a $30,000 car means your LTV ratio is 100%. If you apply for a $35,000 loan to buy the same vehicle, your LTV ratio is 125%.

Why lenders calculate loan to value ratio

Lenders ask for some collateral before approving most loan types to ensure they get their money back in case of necessity. This is how lenders don’t lose their money.

When dealing with auto loans, the collateral is the car. If for some reason, the borrower couldn’t repay the loan, the lenders take possession of the vehicle to recover the money. However, in some cases, isn’t this easy.

For a reason or two, people sometimes ask for loans above the value of the car they want to buy. A couple of reasons for this can be:

• To pay off higher interest loans with the extra cash
• Consolidating their other debts in one loan
• Making modifications to the vehicle.
• This goes to show that lenders approve loans beyond the collateral value. The only time loans of this nature aren’t supported are those times when the LTV ratio is too high. An example of this instance is when a borrower applies for a loan way beyond the car’s value.

The LTV ratio is used to keep the gap between the loan and the car’s value in check. This is the main reason lenders calculate the LTV ratio.

How down payments affects LTV ratio

Putting more money into a vehicle is the best option as results in smaller loans, lesser interests, and a shorter time for payback. Lowering your LTV ratio is one of the best reasons to make a down payment.

An example to help clarify this:

A couple decides to buy a $20,000 car and have a remote starter installed in it too. Additionally, they want to finance a $3,000 from a previous loan. Altogether, the couple’s total loan is $24,500.

If you calculate their LTV using the formula we gave before, it amounts to 122.5%. Depending on the lender, they might get approved or not.

The takeaway here is that if you discover that your LTV is high, ask for less money or make a down payment.

Loan terms don’t have to leave you breaking into tears or pools of sweat these days. To help yourself, kindly get the services of someone who knows the industry well. Here with us, you can get yourself an expert who will be by your side throughout the process, making sure you don’t sign a bad deal. Get in touch with an expert of ours today .

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