When you are buying a car, it’s LTV is a very important factor in determining whether your loan will be approved and how much money you can borrow. So what is LTV when buying a car? LTV is the loan-to-value ratio of a vehicle. Basically, the formula works like this:
Loan Amount / Vehicle Value = LTV
For example, say you are buying a vehicle with a book value of $20,000. You have a down payment of $2000, and the lender gives you a loan of $18,000.
$18,000 Loan / $20,000 Vehicle Value = 90% LTV
The reason LTV ratios can climb higher than 100% is when the loan covers not just the value of the vehicle itself, but other expenses such as sales tax, delivery fees, title and registration, etc.
In a perfect world, lenders would offer you a car loan for any amount that you want so that you could get the ride of your dreams. In reality, lenders want to see that the car is worth between 85 and 115 percent of the loan amount that you request. The idea behind a set LTV guideline is to protect the lender from defaults, allowing them to offer loans to more customers. It is also meant to ensure that, in the event of a total loss accident, the difference between the insurance payout and the loan balance is fairly reasonable.
A lender determines the LTV you can have on your loan based on several factors, but the two main ones are your credit score and your debt-to-income (DTI) ratio. A lender will first look at your DTI to see how much of a monthly payment you can afford. They will want to see that your monthly payment obligations do not exceed between 35 and 40 percent of your gross monthly income. If the new payment puts you over that limit, you may be asked to offer a higher down payment, which will improve the vehicle’s LTV.
Secondly, a lender will consider your credit score, especially your previous use of car loans. If you have a low score and have never had a car loan, you will need to have a lower LTV. That means a higher down payment or a lower priced vehicle. If you have a good credit score and have proven your ability to repay car loans, you may be offered a loan with a higher LTV. Go here to learn more about minimum credit scores for auto loans.
Options if Denied a Car Loan
Even if traditional banks deny your car loan due to LTV, you have lending options open to you. Your first option may be to check local credit unions. They frequently offer car loans to members who have lower credit scores and higher LTVs.
Should you be denied again, you can still try applying to specialty lenders. These lenders thrive on making loans to people who need a second chance auto loan or need a car, but can not offer a high enough down payment to come within the traditional LTV range. You will need to expect a higher interest rate than would have been offered by a traditional bank, but you will still have the car loan that you need.
How We Can Help
Here at Motive Auto Finance, we work with lenders and dealers across the nation that specialize in giving consumers a second chance at financing, whether they have been denied due to credit problems, high debt-to-income ratio, high LTV, or other issues that place them outside of the lending criteria of traditional lenders. All you have to do is apply online via our secure application, and we go to work placing you in the capable hands of a finance specialist who can help you get the car you need at a rate you can afford.