We have received a few questions from clients about loan to value ratio recently and thought it might make a good topic for a blog post. We asked our Halton auto loan team to explain what loan to value ratios are and how they impact auto loans.
Here’s what they came up with.
What is loan to value ratio?
The loan to value ratio, LTV, is the amount of loan to the market value of the car you’re buying with it.
LTV is a measure of risk. The more of the car’s value is being paid for by the loan, the higher the LTV, the higher risk for the lender. The lower the ratio, the lower the risk.
For example, if you’re buying a $40,000 car and are using a $40,000 auto loan to pay for it, that’s 100% LTV because the loan is paying for 100% of the car.
If you were buying a $40,000 car with a $20,000 loan it would be 50% LTV. You’re only using the loan for half, 50%, of the car’s value.
How to calculate loan to value ratio
The working out above gives you a clue how to calculate loan to value ratio. It’s the loan amount divided by the car’s current value.
LTV is usually expressed as a percentage to help working out. We won’t repeat the examples but if you refer back to those two above, you’ll see that LTV takes the amount of the loan from the value of the car you’re buying to give you a percentage.
Why is LTV important?
Loan to value is important for lenders to assess risk. Lenders are considering lending you a lot of money and they want to know the risk involved in lending you that money.
LTV is one of the ways they do that.
As the car acts as collateral on a Halton car loan, the lender knows that if you default on the loan, they won’t lose all their money.
However, if 100% of that collateral is covered by the loan, if they did need to repossess, the lender could lose money. If the value of the car only just covers the amount outstanding on the loan, the lender accepts a risk that they may not get all their money back.
If you borrow more than 100% of the loan, which is possible, the lender may end up losing money.
This is why some lenders set a maximum LTV. The maximum ratio they will lend against an asset. To protect themselves from losses.
Not all lenders set LTV limits and some will lend you 125% LTV. Much depends on your credit score, your financial circumstances and affordability.
Higher LTV loans are useful for people who want to consolidate other debt into a single payment and are more common than you might think!
You can reduce the LTV with a down payment. Typically, the lower the LTV, the better the interest rate. The lower the LTV, the lower the risk to the lender, which they will repay with a lower rate.
That’s why we keep recommending down payments!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!
For any questions or concerns, please don’t hesitate to contact us here!