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How To Calculate Loan To Value On a Car Loan

How To Calculate Loan To Value On a Car Loan

The loan-to-value (LTV) ratio is a crucial metric that lenders use to evaluate the risk of providing a car loan. The LTV ratio compares the amount you wish to borrow to the value of the vehicle you plan to purchase. It provides lenders with insight into how much equity you have in the vehicle that secures the loan.


Understanding your LTV ratio empowers you when applying for a car loan, as it allows you to assess how lenders view your application. Knowing your LTV ratio can help you negotiate better loan terms and interest rates. This article will explain what LTV ratio is, why it is significant for auto loans, and provide a straightforward guide to calculating your vehicle’s LTV yourself.


At its core, the LTV ratio is simple – it is just the size of your loan divided by the car’s value. However, properly determining your vehicle’s value and loan amount takes some research. We’ll walk through the key steps so you can accurately compute your LTV and understand how lenders evaluate your application.

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What is Loan-to-Value Ratio?

The loan-to-value (LTV) ratio is a calculation used by lenders to assess the risk of providing a loan for a vehicle purchase. It represents the size of the loan in relation to the value of the vehicle being purchased. The formula for calculating LTV ratio is:

LTV Ratio = Loan Amount / Vehicle Value x 100

For example, if you take out a $20,000 loan to purchase a car worth $25,000, the LTV ratio would be:

$20,000 / $25,000 x 100 = 80%

The LTV ratio shows the percentage of the vehicle’s value that is being financed by the loan. A higher LTV ratio indicates more risk for the lender, as there is less equity cushion if the borrower defaults.

Typically lenders prefer an LTV ratio of less than 100%, meaning the loan amount is less than the car’s value. LTV ratios over 100% are possible but usually come with higher interest rates or more stringent loan requirements.

The LTV ratio is a key factor lenders use to determine loan approval and interest rates. The higher the ratio, the greater chance of being denied or receiving a higher rate. Knowing your LTV ratio helps inform negotiations with lenders.

 

Why LTV Matters for Car Loans

The loan-to-value ratio is one of the most important metrics lenders use to evaluate the risk of a car loan application. LTV gives lenders insight into how much equity you have in the vehicle – the higher the LTV, the less equity you have and the more risk for the lender.

If your LTV is high, meaning your loan amount is close to or even exceeds the car’s value, the lender sees you as a riskier borrower. This may lead to higher interest rates, stricter loan terms, or even denial of your application.

On the other hand, a lower LTV signals to lenders that you have more equity invested in the vehicle. This makes you look like a less risky borrower, and means you are more likely to get approved and score better interest rates or longer loan terms.

Understanding how LTV impacts your loan terms allows you to take steps to improve it. Focusing on lowering your LTV ratio through tactics like making a larger down payment can pay off via access to more competitive auto financing.

 

How Lenders Calculate LTV

When you apply for a car loan, the lender will calculate the loan-to-value ratio to determine the risk level of offering you financing. Here’s how they determine the two components of LTV:

 

Determining the Car’s Value

Lenders will research the actual cash value or market value of the vehicle you wish to purchase. They use pricing guides like Kelley Blue Book (KBB), the Canadian Black Book, or the Canadian Red Book to look up the typical resale value for that make, model, year and trim level of car based on its condition. The value they find becomes the denominator in the LTV calculation.

 

Using the Loan Amount

The loan amount you are requesting for the car purchase becomes the numerator in the LTV ratio. The lender simply divides your requested loan amount by the researched value of the car to calculate the percentage LTV.

 

Each Lender’s LTV Limits

Every lender sets their own maximum LTV limit before they will deny a loan application as too risky. Most lenders cap their maximum LTV around 125-135%. So if you calculate an LTV over 125%, you may have trouble getting approved unless you put more money down to lower the ratio.

 

How to Calculate Your Car’s LTV Ratio

Calculating the loan-to-value ratio for your car purchase is straightforward with just a few steps:

 

Step 1: Determine Your Car’s Value

The first step is to determine the current market value of the vehicle you want to purchase. This is not necessarily the same as the sale price. The most accurate valuation will come from a professional appraisal by a licensed auto appraiser. However, you can get a good estimate yourself using pricing guides like the Canadian Black Book or checking prices for similar vehicles listed for sale in your area.

 

Step 2: Identify Your Requested Loan Amount

Next, you’ll need to know the amount you plan to finance with the auto loan. This is the total loan amount you’ll request from the lender. Be sure to factor in any down payment you plan to make, as that will lower the loan amount.

 

Step 3: Divide the Loan by the Value

Now divide the loan amount by the vehicle’s value that you determined in Step 1. For example, if your loan request is $20,000 and the value is $25,000, you would calculate:

$20,000 ÷ $25,000 = 0.8

 

Step 4: Assess Your LTV Ratio

The final step is to convert the decimal figure into a percentage by multiplying by 100. In our example, 0.8 x 100 = 80%. This means the LTV ratio on this loan is 80%. Generally, the lower the ratio the better when applying for a car loan, as it represents less risk to the lender. A ratio under 100% is ideal, while over 125% may mean higher interest rates.

 

Determine Your Car’s Value

Determining your car’s accurate market value is a key step in calculating loan-to-value ratio. There are a few ways to estimate your car’s worth:

 

  • Get an appraisal from an auto appraiser. They will inspect your vehicle and provide a professional opinion on its market value.
  • Consult pricing guides like the Canadian Black Book or CarProof. Enter your car’s make, model, year, mileage and features to see typical selling prices.
  • Check online car listing sites and forums to see what similar vehicles have sold for recently. This can give you a good sense of real-world prices.
  • Factor in your car’s mileage, condition, and options. Higher mileage and wear will lower value, while extra features can increase value.

 

Getting multiple estimates from pricing sources, listings and appraisers will give you an accurate picture of your car’s current value. This will allow you to calculate LTV appropriately.

 

Identify Your Loan Amount

The loan amount is the total amount of financing you need to purchase the vehicle. There are a few key factors that determine your loan amount:

 

  • Amount you wish to finance – This is the portion of the car’s price that you need to borrow, rather than pay upfront. Determine how much cash you can put down as a down payment first.
  • Down payment – Your down payment reduces the amount you need to finance. Save up to put down as much as you can afford.
  • Maximum amount allowed by lender – The lender will limit the maximum loan amount to a percentage of the car’s value, typically 120-130%. This caps how much you can borrow.

 

When applying for a loan, shop around among multiple lenders to find the one willing to finance the amount you need. Having a lower loan amount relative to your car’s value will result in better loan terms from lenders.

 

Calculate the LTV Ratio

Now that you have the loan amount and the car’s value, you can calculate the loan-to-value ratio using this simple formula:

LTV Ratio = (Loan Amount ÷ Car Value) x 100

Let’s look at an example:

 

  • Loan Amount: $20,000
  • Car Value: $25,000

 

LTV Ratio = ($20,000 ÷ $25,000) x 100 = 80%

In this example, the LTV ratio is 80%. This means the loan amount of $20,000 is 80% of the car’s value. The lower the LTV ratio percentage, the less risk for the lender.

An LTV ratio under 100% is generally considered ideal, as the loan amount is less than the car’s total value. A ratio of 100-120% may mean slightly higher interest rates, while over 120% can make approval difficult and rates much higher.

 

Assess Your LTV Ratio

Once you’ve calculated your car’s LTV ratio, you’ll want to assess where it falls to determine how lenders may view your loan application. Generally speaking:

 

  • Under 80% is considered ideal and will likely qualify you for the very best rates and terms.
  • 80-100% is still a good LTV range that demonstrates lower risk, often leading to loan approval.
  • Over 100% means your loan amount exceeds your car’s value, which may mean higher interest rates or difficulty getting approved.
  • Over 125% can make it much harder to qualify for a loan, as the risk is seen as quite high by most lenders.

 

The lower your LTV ratio, the better position you are in when applying for a car loan. Anything under 100% is preferable, as it shows your vehicle holds its value well versus the amount financed.

 

Tips for Improving Your LTV Ratio

If your LTV ratio is higher than you’d like, there are several strategies you can use to bring it down and qualify for better loan terms:

 

Make a Larger Down Payment

Putting more money down upfront directly reduces the amount you need to finance, lowering your LTV. Even an extra few thousand dollars could make a difference. Shop around for the best rate on your specific down payment amount.

 

Pay Down the Principal

If you already have a car loan, making extra payments toward the principal balance will reduce what you owe faster. This decreases your loan amount in the LTV ratio. Ask your lender about setting up bi-weekly or weekly payments to accelerate payoff.

 

Trade for a Less Expensive Vehicle

Trading your current vehicle for one of lower value can instantly improve your LTV, since the loan amount stays the same but the car value decreases. Just make sure the savings outweigh any fees for early trade-in.

 

Increase Your Credit Score

Having a higher credit score can qualify you for lower interest rates, meaning you pay less over the loan term. Work on improving your credit by paying bills on time, lowering balances, and correcting any errors.

 

Shop Around with Your LTV Ratio

Once you’ve calculated your LTV ratio, you can use it as a negotiating tool when shopping for the best car loan. Compare offers from multiple lenders to find the most competitive rates and terms based on your specific LTV. Keep in mind that lenders view higher LTV ratios as riskier, so you may be able to get a lower interest rate with a strong LTV of 80-90%.

Bring your LTV ratio and supporting documents to discussions with lenders. Explain how your ratio demonstrates you are putting up a reasonable down payment and have equity in the vehicle. Negotiate for a lower interest rate or better loan terms if your LTV ratio is favourable.

Widen your search beyond banks to find the best rates. Many credit unions and online lenders cater to borrowers with higher LTVs. Shop around and compare quotes to leverage your LTV ratio and find the most affordable monthly payment. Having a good LTV can open up financing options and give you negotiating power.

 

Alternatives If You Have a High LTV

If your loan-to-value ratio is on the high side, meaning you’re borrowing a large portion of your vehicle’s value, you have some options to improve your chances of getting approved and securing better loan terms.

One option is to add a creditworthy co-signer to your application. Their income, credit score, and existing debt will factor into the lender’s decision, which could lead to a lower interest rate. Just make sure the co-signer understands they’ll be equally responsible for repaying the loan.

Looking at certified pre-owned vehicles can also help. Since they tend to be priced lower than comparable new models, your loan amount may make up a smaller percentage of the car’s value. This improves the LTV ratio from the lender’s perspective.

Finally, leasing could be an alternative to buying that results in lower monthly payments. With a lease, you only pay for the vehicle’s depreciation during the lease term, not the entire purchase price. Just be aware of mileage limits and the requirement to return the car at lease-end.

Weighing all your options, not just traditional financing, allows you to find the most advantageous terms when your LTV is on the high end. The goal is to reach a number the lender is comfortable with so you can get approved and drive away in your desired vehicle.

 

Special Cases: 0% LTV Car Loans

A 0% LTV ratio on a car purchase means you are not taking out any loan and paying for the vehicle entirely in cash. Without financing, you remove the lender from the equation and don’t need to factor their risk assessment into your deal.

Paying cash allows you to negotiate the price of the vehicle directly with the dealer, without worrying about interest rates or loan terms. You have more flexibility to push for the lowest price since you won’t be relying on financing.

However, even when paying cash you still want to carefully assess the value of the vehicle. Research prices using resources like Kelley Blue Book and get an independent inspection. This protects against overpaying and ensures you get fair value for your money.

A 0% LTV purchase simplifies the transaction but still requires doing your homework on pricing. Know the car’s worth before negotiating so you don’t end up overspending just because you have cash in hand.

 

Recalculating LTV When Refinancing

When you first take out a car loan, the lender calculates the LTV ratio based on the loan amount and your car’s value at that time. But over the course of the loan term, your LTV ratio can change as you make payments and as your car depreciates.

Paying down the principal on your loan over time will lower your LTV ratio. Each monthly payment includes both interest and principal, so the loan balance goes down. With a smaller loan amount and the same car value, your LTV will improve.

However, depreciation can negatively impact your LTV. As vehicles age, they lose value. After a few years, your car will be worth less than when you originally bought it. This means the denominator in the LTV calculation goes down, increasing your ratio.

When you refinance an existing car loan, it’s important to recalculate your new LTV ratio. Use the current payoff amount for your loan as the numerator. For the denominator, get an updated appraisal or check a pricing guide to determine your car’s current market value. Then divide and convert to a percentage to find your new ratio.

Knowing your LTV when refinancing helps you negotiate the best possible interest rate and terms on your new loan. The lower your LTV, the better financing offers you can qualify for.

 

Conclusion

The loan-to-value ratio is a crucial metric to understand when financing a car purchase. Your LTV ratio directly impacts the loan terms and interest rates you may qualify for, so taking the time to calculate and improve your ratio can really pay off.

As we covered, LTV is simply your loan amount divided by the car’s value. A lower ratio signals less risk for the lender, opening up better financing options. On the other hand, a high LTV over 100% means you’re borrowing more than the car is worth, making lenders leery.

If you have a high LTV, focus on bringing it down before applying for a loan. Making a larger down payment is the easiest way to improve your ratio. But even after getting a loan, you can pay down the principal or trade up to a more valuable car to lower your LTV over time.

Knowing your LTV ratio before meeting with lenders gives you a huge advantage. You’ll understand how they assess loan risk and can negotiate more favourable terms. While LTV isn’t the only factor, monitoring and optimizing this simple metric can make a big difference in financing the car you want.

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Questions About Calculating LTV

To calculate the loan value of a vehicle in Canada, you divide the loan amount by the vehicle’s value and multiply the result by 100 to get a percentage. For example, if you take out a $25,000 car loan to buy a $30,000 car, your loan-to-value ratio would be 83%.

The formula for loan-to-value (LTV) in Canada is:

 

LTV = (Loan Amount ÷ Asset Value) x 100

 

So if you have a $300,000 mortgage on a home valued at $400,000, the LTV would be:

 

($300,000 ÷ $400,000) x 100 = 75%

In Canada, a good loan-to-value ratio for a car loan is typically 80-90%. This means your loan amount is 80-90% of the car’s value. Anything below 100% is generally considered a good LTV, as the loan amount is less than the car’s worth.

A 120% loan-to-value ratio on a car loan in Canada means you owe 20% more on the loan than the car is currently worth. For example, if you owe $12,000 on a car now valued at $10,000, your LTV is 120% ($12,000 ÷ $10,000 x 100). An LTV over 100% makes it harder to qualify for refinancing.

Most lenders in Canada set the maximum loan-to-value ratio for auto loans around 125-130%. This means they will lend up to 125-130% of the vehicle’s value. So on a $10,000 vehicle, you could potentially get approved for a loan up to $13,000.

Yes, some banks and lenders in Canada do offer high loan-to-value auto loans up to 130% LTV. These loans carry more risk for the lender, so expect to pay a higher interest rate. Applicants generally need good credit to qualify for LTVs over 100%.

To determine the value of your used car when applying for a loan in Canada, consult vehicle value guides like the Canadian Black Book or CARPROOF. You can also see what similar vehicles are selling for on AutoTrader.ca. Consider the make, model, year, mileage and condition compared to your car.

To determine used car loan value in Canada, lenders will want to know the vehicle’s make, model, year and mileage. You’ll also need to provide general condition, features, maintenance records and any major repairs done. Photos or appraisals may be requested. Your income, expenses and credit score are also factors.

In Canada, the lower your loan-to-value ratio, the better chance you have at refinancing your car loan at a lower interest rate. If your LTV is under 100 percent, meaning you owe less than the car’s value, lenders see you as less risky to lend to.

 

Most lenders in Canada require a maximum LTV ratio of 125% to refinance a car loan. This means you can refinance if you owe up to 25% more than the car’s current value. An LTV under 100% is ideal, as you owe less than what the car is worth.

 

To check the loan-to-value ratio on your current Canadian auto loan:

 

  1. Determine your vehicle’s value via CARPROOF, Canadian Black Book or getting an appraisal
  2. Find your current loan balance on statements or by contacting your lender
  3. Divide the loan balance by vehicle value and multiply by 100 to get LTV ratio

In Canada, here are the average new and used auto loan interest rates based on loan-to-value ratio:

 

– Under 60% LTV: 3.99%

– 60-80% LTV: 4.99%

– 80-100% LTV: 6.99%

– Over 100% LTV: 8.99%+

 

So the higher the LTV, the higher interest rate you can expect to pay.

Most lenders in Canada make you wait 30 days after paying off an auto loan before they will approve you for another car loan. This allows the paid loan to be reported to credit bureaus and show you can manage debt responsibly.

Yes, Canadian dealerships generally allow you to trade in a vehicle you still owe money on. The loan balance will be added to the financing of your new car purchase. You may also be able to transfer the old loan to a new private buyer if your lender allows assumption of auto loans.

 

If you owe more than your car is worth in Canada (an upside-down or negative equity loan), you may be able to refinance at a lower rate, take out a personal loan to cover the difference, add the difference to a new car loan, or continue paying down the loan to eventually get above water.

Most mainstream auto lenders in Canada make you wait at least 12-24 months after filing a consumer proposal before they will approve you for an auto loan. Rebuilding your credit score and showing you can make regular payments on secured debt can help improve chances sooner.

Those with bad credit can get a car loan from alternative lenders in Canada that specialize in subprime lending, like CARMA, Rifco National Auto Finance, Auto Capital Canada or Cars on Credit. Interest rates are higher to offset the risk, but they report to credit bureaus to help rebuild your score.

 

Those with poor credit seeking the best possible auto loan interest rate in Canada should: apply with a co-signer in good financial standing, make a sizable down payment of 20% or more, use collateral, limit loan term to 3 years or less, and have proof of stable income.

 

Currently in Canada, borrowers with bad credit can expect an average used car loan interest rate around 11-15% from subprime lenders that work with credit challenges. Those with the worst credit may see rates peak near 20-29% depending on additional risk factors.

 

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