How do lenders determine the loan-to-value ratio of a car?

I read that the loan-to-value ratio is important for car loan approval, but I’m not sure what that means or how to calculate it. How do lenders figure out a car’s loan-to-value ratio?

Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Great question! I’m happy to say that to determine the LTV, you can simply divide the loan amount by the actual cash value (ACV) of the car.
Loan-to-value ratios, or LTVs, are considered one of the simplest calculations in the
car loan
industry since it’s simply long division. For example, if you want a car that has a $30,000 price tag, but the car has an ACV of $33,000, your LTV would be $30,000/$33,000, which equals about 90.9%.
The reason that this ratio is important is that it identifies potential risk in the loan. A car that has an LTV of more than 100% has a loan value that is higher than the value of the car. If you defaulted on this loan, the lender wouldn’t get their money back even if they sold the car at auction. Therefore, they can decline this loan, offset the risk with a higher interest rate, or only extend the offer to highly qualified buyers.
In most cases, buyers that can get an LTV ratio over 100% often have stellar credit scores, and lenders often cap the LTV ratio at 110% or 120% to minimize overall risk. Keep in mind that getting a car loan with an LTV ratio higher than 100% will put you immediately
upside down
on the loan, so it’s good to be absolutely sure that you can pay off a high LTV before signing up for it.
If you do end up with a higher LTV, you might want to save money in other areas, like your car insurance. To easily make sure you’re getting the best deal on the coverage you need, check out the
app! We’ll get you customized quotes from top insurers in seconds, so that all you have to do is pick the plan that works best for you.
Best of luck with your loan!
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