Your interest rate can make – or break – your monthly payment. For many of us, buying a car is a necessity. In places where public transit is limited or non-existent, it’s literally the only way to get around. As workers return to the office and find themselves commuting…
A high credit score and the right lender, could get you a loan greater than a car’s purchase price.
The average cost of a new car topped $47,000 in 2022, according to Kelley Blue Book. So, if you are shopping for a car, chances are that you’ll need financing to finalize your car purchase.
But depending on your finances, you might be wondering if it’s possible to get a car loan for more than the purchase price. The short answer is yes, but ultimately it’s up to the lender. Let’s explore how this is possible. Plus, whether or not this is the right option for your finances.
Are Car Loans for More Than the Purchase Price an Option?
If you want to get a car loan for more than the purchase price, it’s important to get familiar with the term LTV, or loan-to-value ratio. What does this term mean for your chances of getting a car loan for more than the purchase price?
Essentially, the purchase price will act as the value in this situation. And the loan is the amount of money that you are borrowing to finance your purchase. So if you want to get a car loan for more than the purchase price, then you are looking for a lender that will allow an LTV of more than 100%.
It is possible to find lenders willing to offer loans with an LTV that exceeds 100%, however the exact offer will vary based on the lender. An LTV maximum of 125% is relatively common across the auto industry. But some lenders are even willing to approve LTVs of more than 130%.
Can I Get a Car Loan for More Than the Purchase Price?
Within the auto industry, you can find lenders willing to offer car loans for more than the vehicle’s purchase price.
In our own data we saw that 24.4% of approved applications through RateGenius had LTVs over 100%, during the first five months of 2022. That’s nearly one out of every four applicants.
If you have a low credit score, then you’ll most likely be out of the running for a car loan with an LTV that exceeds 100%. Instead, the lender will likely require you to make a larger down payment to offset the risk presented by your lower credit score.
Advantages of Taking Out a Car Loan for More Than the Purchase Price
As with all financial decisions, there are some advantages and disadvantages to taking out a car loan for more than the purchase price. Here’s what you should consider before diving in.
Let’s start with the pros of taking out a car loan for more than the purchase price:
- Lower down payment: When you take out a car loan with an LTV that exceeds 100%, you’ll find a lower down payment requirement.
- Roll the taxes and fees into your loan: Paying taxes on your vehicle purchase is unavoidable. But many car loans also come with extra fees. If you can’t afford to pay for this upfront, a lender with high LTV limits may allow you to roll the costs into your loan.
Disadvantages of Taking Out a Car Loan for More Than the Purchase Price
But when taking out a loan with an LTV over 100%, there are some disadvantages to be aware of as well. A few include:
- Owe more than the car is worth: When you take out a loan with an LTV over 100%, you’ll owe more than the car is worth. In other words, you’ll have negative equity in the vehicle.
- Higher monthly payment: A high LTV means you have less of a chance to obtain a low Annual Percentage Rate (APR). Unfortunately, this can mean that a higher monthly car payment takes a bite out of your budget each month.
If possible, you’ll want to pursue a car loan with a lower LTV because lower interest rates and monthly payments are possible when you owe less than the car is worth.
But it’s not always an option to make a big down payment. If you need to obtain financing, taking out a car loan for more than the purchase price is possible for car buyers with high credit scores. But your loan might come with a longer term or higher loan rates.
Reasons Why You Might Get a Car Loan for More Than the Purchase Price
Remember, this is typically only an option for borrowers with an excellent credit score.
But as you weigh your options, let’s consider a few reasons why you might get a car loan for more than the purchase price of your vehicle.
Upside-down loan trade-in
If you have an upside-down car loan, that means you owe more than the vehicle is worth. In other words, your LTV is greater than 100%. So, if you sold your car, then you’d still owe money to the lender after applying the proceeds of the sale.
Car (LTV) Loan-to-Value Calculator
One way to clear an upside-down car loan from your balance sheet is to trade it in to a car dealership. In this case, you could trade in your current vehicle for a more affordable set of wheels.
But if your vehicle has a trade-in value of $18,000 and you owe $20,000, then you’ll still have an outstanding balance of $2,000. At that point, you could choose to roll that outstanding balance into a new loan and finance a cheaper car.
When you roll your loan into your next car, you’ll be upside down on your new car loan immediately. That’s because the outstanding balance of your previous loan will be added to the price of the vehicle for the total amount owed.
Continuing with the example above, let’s say you roll the remaining outstanding balance of $2,000 into a used vehicle with a total cost of $8,000, then your new loan balance would be $10,000.
But ideally, with a cheaper used car and a longer loan term, you’ll walk away with a lower monthly payment. That lower monthly payment can give you the breathing room you need in your budget to work on paying off the outstanding principal balance.
No down payment option
When you are trying to obtain a new vehicle, a no or low down payment option is incredibly enticing. After all, you can get the ride you need right away without forfeiting all of your cash. If you aren’t making a down payment, or you’re making a very small one, your loan to value ratio might be over 100%.
That’s especially true if you are rolling extra purchase costs into the loan. For example, let’s say that you are rolling the taxes and fees into your auto loan without making a big down payment. It’s likely that your LTV will be over 100% in this situation.
Borrowers making a smaller down payment should expect to pay a higher interest rate, which unfortunately could cost you thousands more over the lifetime of the loan. Not all lenders allow this, but some offer this option to high credit customers. As a borrower with poor or bad credit, you would struggle to find this option.
Before you close on a loan, many car dealers will offer add-on products to enhance your vehicle ownership experience. For example, you might be offered a Guaranteed Auto Protection (GAP) waiver, a Vehicle Service Contract (VSC), wheel coverage, and more.
Each of these products can be a good fit for the right driver. But if you choose to roll the purchase of any of these add-ons into your loan, your LTV will increase. That’s because the loan amount will increase, but not the vehicle’s value.
For example, let’s say that a car’s value is $10,000. Additionally, you decide to roll in a vehicle service contract priced at $1,000 into your loan amount. With that, your total loan amount would be $11,000. But since the car’s value won’t increase based on this add-on, your LTV ratio would be 110%.
Depending on your needs and your personal finance situation, you might want to spring for loan add-ons. Just be aware that with each add-on rolled into the loan, your loan to value ratio will increase.
A cash-out refinance for your auto loan presents an interesting opportunity. Although not offered by all lenders, this is one type of loan that will require a higher LTV than your current auto loan.
If you need funds quickly, this type of loan can help you tap into the equity you’ve built in your vehicle. Essentially, you can take out a new loan to replace your existing auto loan while pulling some cash out of the equity you’ve built.
The obvious downside is that you’ll be taking on more debt. But it could be a worthwhile solution to solve immediate cash flow needs. For example, let’s say you have high interest credit card debt. Pursuing a cash-out auto loan refinance with a relatively low interest rate to pay off those loans might be the right move for your finances.
Can I Refinance an Upside-down Car Loan?
If you have a car loan with a high LTV, it can be more difficult to qualify for refinancing. However, it’s not impossible for those with a high credit score.
In fact, based on data reviewed by RateGenius regarding auto refinance loan applications from 2015 to 2019, 90% of approved applicants had an LTV of 123% or lower. As a borrower, that means it’s possible to get approved for an auto loan refinance even if you are upside-down on your car loan.
Why should you consider refinancing with a loan with a high LTV? Ultimately, the goal of refinancing is to save money on your auto loan costs. That’s possible by tapping into a lower interest rate, which can lead to lower loan payments.