Car Loan-to-Value Ratio Explained: Why LTV Matters

Read Time: 4 minutes

If you plan to purchase a new car using an auto loan, your lender will consider several factors when assessing your loan application. One is the loan-to-value ratio, also known as LTV.

Because the car itself is used as collateral for the loan, lenders use the LTV to indicate how much risk they’ll take by loaning you money. The higher the LTV, the more risk the lender will assume.

Keep reading as we explore how LTV is calculated, how it can affect your auto loan, and what happens when your LTV is too high.

How to Calculate LTV

When looking at cars, it’s important to understand the LTV since it can impact your auto loan. Here’s how to calculate LTV:

Loan Amount / Car Value X 100 = LTV

Let’s assume you’re looking to purchase a car for $25,000 and will use a down payment of $3,000. This means your loan would be for $22,000. The LTV would be the following.

$22,000 / $25,000 X 100 = 88%

Let’s also assume you will trade in your existing car, valued at $6,000. This would reduce your loan amount to $16,000.

$16,000 / $25,000 x 100 = 64%

Ideally, you want your LTV to be as low as possible. However, each lender is going to assess applications differently. Some lenders might approve any loan with an LTV below 100%, while others might want it lower.

How Loan-to-Value Can Affect Your Car Loan

Even though the Loan-to-Value ratio is only one factor lenders will consider when evaluating loan applications, it can impact many things, including whether you’ll be approved and the interest rate you’ll receive.

Loan Approval Odds

The higher the LTV, the more risk the lender will take. The exact percentage is going to vary from one lender to the next, but most will have a maximum LTV they’re willing to lend at.

Anything above this limit and the application will likely be declined. Typically, this will fall somewhere between 100% and 150%.

Interest Rates

Because of the additional risk, most lenders will increase the interest rate with higher LTV applications. This allows them to mitigate their risk.

Additional Down Payment

If the LTV is too high for the lender, they could ask you to come up with a larger down payment, reducing your LTV and increasing the chances your loan is approved. Larger down payments can also reduce your interest rate and monthly loan payments.

How to Lower Your Loan-to-Value

Increase Your Down Payment

The best way to lower your LTV is to use a larger down payment. For example, assume you’re purchasing a $35,000 car with a $2,000 down payment. Your loan amount would be $33,000, giving you a LTV of 94%. 

However, if you can increase your down payment to $10,000, you could reduce your LTV. Your loan amount would decrease to $25,000, giving you a LTV of 71%.

Consider a Less Expensive Car

If you cannot use a larger down payment, you could also choose a less expensive car. This could increase the chances of your loan being approved and lower your interest rate.

If you can only afford a $2,000 down payment, you could opt for a $25,000 car instead of the $35,000 car. This would reduce your LTV from 94% to 92%. While it’s not a significant change, it could impact a lender’s decision.

Avoiding Negative Equity

It’s possible that you have an LTV greater than 100%. This would mean you have negative equity in the car, which is sometimes referred to as being upside down on your loan. 

Having an LTV above 100% means you owe more on the car than its actual value. This can happen in a couple of different ways.

  1. You could use no down payment, and the lender will still be willing to approve your loan. Often this situation will lead to an LTV greater than 100%. For example, you could purchase a car for $20,000 with no down payment, but once you add in taxes and registration, your loan could be $23,000 for a car valued at $20,000.
  2. You could also end up with an LTV above 100% if you have a balance on an existing auto loan and plan to roll that into your new loan. Suppose you’re buying a $20,000 car with no down payment and still owe $3,000 on an existing loan. Your new LTV would be 115%.

Other Factors Lenders Consider When Approving Loans

LTV is just one of several factors lenders will consider when evaluating your loan application. 

Credit Score and Credit History

Your credit score will also play a significant role in the application process. The higher your credit score, the more likely you will make on-time payments on your loan.

Higher credit scores also generally lead to lower interest rates.


Lenders also want to see that you have a consistent flow of income. This gives them confidence that you’ll be able to continue making loan payments.

Debt-to-Income Ratio

Lenders will also want to know how much of your income is going to other monthly debt payments. Debt-to-income ratios are calculated by calculating how much you pay each month towards debt payments and dividing this number by your total income.

The Bottom Line

There are a lot of things that go into a lender’s decision to approve an auto loan application. While your loan-to-value ratio is just one of them, it can greatly impact your application approval and the interest rate you’ll receive.

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards, and real estate. With more than 15 years of writing experience, his work has appeared in many of the industry’s top publications including Time and Investopedia . He holds a Bachelor of Arts degree in economics.

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