Your Loan-To-Value Ratio and Car Loan Refinancing

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by Carter Kilmann

Oh, boy — another acronym to learn when you’re seeking a car refinance loan: LTV.

Your loan-to-value ratio (LTV) is an important metric that lenders review when you apply for a loan. Fortunately, LTV is fairly simple and easy to calculate.

Whether you’re in the market for a new mortgage or you’re thinking about refinancing your current auto loan to lower your car payment, you need to understand the ins and outs of your LTV. Buckle up (pun intended)we’ll walk through everything you need to know about your loan-to-value ratio and car loan refinancing.

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What Is the Loan-to-Value Ratio?

Several factors impact your ability to get a loan. Besides your credit history, credit score, and debt-to-income ratio, lenders also use your LTV to decide whether or not you’re a good candidate for a loan.

As the name states, your LTV consists of two factors: (1) your loan amount and (2) the value of the asset that secures the loan (i.e. your car’s value).

LTV is expressed as a percentage. For example, if your car loan is the same value as your car, your LTV is 100%. An LTV over 100% means you owe more on your loan than your car is worth.

Why Is the Loan-to-Value Ratio Important?

Your loan-to-value ratio impacts your ability to receive financing. If your LTV is higher than lenders are comfortable with, you’ll have a hard time getting a loan.

Conventional lenders (like banks and credit unions) are conservative — they don’t like making risky loans. The loan-to-value ratio helps lenders quantify risk. By using LTV, lenders can calculate whether or not they’re protected (and how much cushion they have) if you default on the loan.

Why?

If you want to borrow money, the lender will want something in return if you stop making payments and default on the loan. That “something in return” is collateral, which protects lenders. If you get an auto loan, the collateral is the car you’re purchasing. If you get a home loan, the collateral is the house you’re buying.

In other words, if you stop making payments, lenders will take comfort knowing that they can sell the asset (your car) and recoup their loss. So, your LTV helps lenders figure out if it’s worthwhile to lend people money.

Why else is LTV important? Because it could impact your interest rate, too. A high LTV means more risk for the lender. To compensate for this risk, the lender will charge higher interest. Higher interest means higher monthly payments — which means more money coming out of your pocket every month.

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How Is Your Loan-to-Value Ratio Calculated?

Unlike the debt-to-income ratio, your LTV doesn’t combine all of your loans and corresponding assets. It’s on an asset-by-asset basis — unless you have multiple loans against one asset (like a second mortgage). In that case, you’d consider both loan amounts compared to the value of the asset.

You can calculate your LTV in three quick steps:

  1. Figure out your loan balance. Log into your lender’s website or check your most recent loan statement to find your balance.
  2. Determine the value of your asset. For cars, there are several reliable, easy-to-use websites that can help you value your vehicle, such as Kelly Blue Book, Edmunds, and NADAguides. For houses, you’ll need an appraisal — but you can get a rough estimate from websites like Zillow.
  3. Divide your loan balance by your asset’s value. Once you do, multiply this ratio by 100 to express as a percentage. And that’s it!

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For example, let’s say you have a $30,000 auto loan and your car is worth $35,000. Your LTV would be 85.7% ($30,000 divided by $35,000, multiplied by 100).

In this case, you have positive equity of $5,000 or 14.3% — which just means the value of your collateral is greater than the outstanding loan.

If your auto loan was greater than your car’s value, you would have negative equity; you owe more on the loan than what your car is worth. This is also known as being “upside down” or “underwater” on your loan.

Since car values can fluctuate over time, your LTV can change too. In general, cars depreciate each year, especially with use (even more so if they’re involved in accidents). On top of that, new cars depreciate even faster. After just one year of ownership, a new car’s value often drops by more than 20%.

So, if you’re considering refinancing your auto loan, it’s important to consider the impacts of depreciation since your initial purchase.

Who determines the value of my car if I want to refinance my car loan? 

That’s a good question. Fortunately for you, if you’re applying for an auto loan or a refinance loan, you don’t need to worry about calculating the actual cash value (ACV) of your vehicle. The lender will take care of that via a bookout.

During the bookout process, your car’s condition is compared against the book values used by your lender (like NADA, Kelley Blue Book, or BlackBook) and evaluated to appraise your car. An invoice is produced, and that figure on the document is your car’s value — that’s the number they’ll use to calculate your loan-to-value ratio when applying to refinance your auto loan.

Your car’s condition is important. For example, if your car mileage is higher than average, that could decrease the value of your vehicle — or make you ineligible to refinance altogether.

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What Is a Good Loan-to-Value Ratio for Car Loan Refinancing?

The short answer: the lower, the better. For auto refinance loans, an LTV of 100% or less is considered a good LTV.

A low LTV means you have a better chance of getting favorable loan terms, like a lower interest rate and a lower monthly payment. It also means you have more equity in your asset (your car), and you’re less likely to be upside down throughout the life of your new car refinance loan.

While an LTV above 100% isn’t considered good, that doesn’t mean you can’t get approved for a refinance loan. In fact, RateGenius reviewed auto refinance loan applications from 2015 to 2019 and found that 90% of approved applicants had a LTV of 123% or lower.

That begs another question: What’s a bad LTV?

RateGenius reviewed auto refinance loan applications from 2015 to 2019 and found that 90% of approved applicants had a LTV of 123% or lower.

What Is a Bad Loan-to-Value Ratio for Car Loan Refinancing?

As you can probably guess, the higher, the worse. Don’t worry though — you’re not doomed if you have a high LTV.

It depends on the lender, but across the auto industry the most common LTV max is 125% to 130% of a vehicle’s retail value — which is the car’s “for sale” value. In other words, if your car’s retail value is $10,000, you could still potentially get approved for a $13,000 refinance loan (LTV of 130%).

Some lenders will approve LTVs above 130% — but they’re more likely to focus on a vehicle’s trade-in value. Trade-in value is the price dealerships offer for your car when you trade it in for another model. Trade-in value is considerably lower than retail value.

Using the above example, your car’s retail value is $10,000 — but your trade-in value might only be $7,000. So, a lender that focuses on trade-in value might be willing to issue you a $9,800 loan (LTV of 140%).

Again, LTV is subjective. Lenders have varying preferences. Some lenders may offer loans at higher LTV percentages, but they’ll likely require a higher credit score, lower debt-to-income ratio, or less favorable terms.

How Can I Lower My Loan-to-Value Ratio?

If you want to increase your chances of getting approved for a car refinance loan — or receive better terms, you should consider lowering your loan-to-value ratio.

Since your LTV consists of two factors (your loan and your asset’s value), you would need to either decrease your loan or increase your asset’s value to lower your LTV. The most straightforward route to lowering your LTV is to pay down your existing loan.

Once you do, you’ll have a better chance of refinancing your current loan and getting the best rates.

The Bottom Line

The loan-to-value ratio is an important metric to monitor. If you’re looking to refinance your car loan, your LTV will factor into a financial institution’s decision to lend to you.

Consider paying down your existing loan or buying an older (and less expensive) model. That will lead to a lower LTV — and a better chance of securing a refinance loan with a better interest rate and a lower monthly payment.

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About The Author


Carter Kilmann

Carter Kilmann is a personal finance writer and editor for hire, covering topics like credit cards, mortgages, budgeting, banking, and investing. He's written for The Points Guy, Investing.com, Thrive Global, Day to Day Finance, Money Mini Blog, and more.


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