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Money Advice: Understanding Loan-to-Value (LTV) and Getting the Best Car Deal

When buying and financing a car, understanding the Loan-to-Value (LTV) ratio is crucial. LTV is a significant factor that impacts the terms of your car loan and the overall cost of vehicle ownership.

The easiest and most straightforward way to save money when buying a car (and anything else that you’re financing – a house, for example) is to reduce the initial LTV of the transaction. The easiest way to reduce LTV is by increasing the down payment. You may consider reading this article for more information on the ideal down payment: Down Payment Advice: The Sweet Spot When Buying a Car.

In this Happy Car Deal blog post, we cover the concept of LTV, its calculation, and its implications on car buying and financing decisions. By familiarizing yourself with LTV and its role in the car-buying process, you can make informed choices and navigate the financing landscape much more confidently.

What is Loan-to-Value (LTV) Ratio?

  1. Definition: LTV is a financial metric that expresses the relationship between the loan amount and the market value or purchase price of the car. It is typically represented as a percentage.
  2. LTV Calculation: To calculate the LTV ratio, divide the loan amount by the appraised value or purchase price of the car and multiply by 100.
  3. Example: If you are purchasing a car for $25,000 and obtaining a loan for $20,000, the LTV ratio would be (20,000 / 25,000) x 100 = 80%.

The Role of LTV in Car Financing

  1. Impact on Loan Terms: LTV plays a significant role in determining the loan terms offered by lenders. Higher LTV ratios may result in less favorable loan terms, such as higher interest rates or shorter repayment periods.
  2. Risk Assessment: Lenders use the LTV ratio to assess the risk associated with a loan. A higher LTV indicates a greater risk for the lender, as the borrower has less equity in the car, making it potentially challenging to recover the loan amount in case of default.
  3. Loan Approval: Lenders may have specific LTV thresholds for loan approval. If the LTV exceeds the lender’s limit, the borrower may need to provide a larger down payment or seek alternative financing options.

Factors Affecting LTV

  1. Purchase Price: The purchase price of the car directly influences the LTV ratio. Higher-priced cars may result in higher LTV ratios, especially if the borrower provides a small down payment.
  2. Down Payment: The down payment is a crucial factor in determining the LTV ratio. A larger down payment reduces the loan amount, leading to a lower LTV and potentially more favorable loan terms.
  3. Trade-In Value: If the borrower is trading in a vehicle as part of the down payment, the trade-in value contributes to reducing the loan amount and, subsequently, the LTV ratio.
  4. Depreciation: The rate of depreciation of the car affects the LTV over time. Cars with a higher depreciation rate may experience a higher LTV ratio, potentially leading to negative equity if the borrower seeks to refinance or sell the car before paying off the loan.

Rolling negative equity (i.e., a negative trade value) into a new car loan is one of the most common reason customers see an LTV spike and difficulty during approval processes. If you are in a situation where you feel “stuck” in a bad car loan, please reach out to me and let’s put together a personal plan.

Ideal LTV Ratio for Car Financing

  1. Industry Standards: While there isn’t a strict industry-wide standard for the ideal LTV ratio, many lenders prefer a lower LTV, ideally below 80%. This ratio ensures the borrower has a substantial equity stake in the vehicle, reducing the risk of default.
  2. Benefits of a Lower LTV: A lower LTV can lead to lower interest rates, longer repayment periods, and more manageable monthly payments, making the loan more affordable for the borrower.
  3. Flexibility in Loan Terms: With a lower LTV, borrowers have more negotiating power when seeking loan terms, as lenders perceive the loan as less risky.

Strategies to Optimize LTV When Buying and Financing Cars

  1. Increase Down Payment: Providing a larger down payment reduces the loan amount, resulting in a lower LTV ratio. Saving up for a substantial down payment can help secure better loan terms.
  2. Consider Depreciation Rates: When choosing a car, consider the expected depreciation rate. Opting for a vehicle with a lower depreciation rate can help maintain a healthier LTV ratio over time.
  3. Trade-In or Sell Existing Vehicle: Trading in or selling an existing vehicle can provide additional funds for a down payment, effectively reducing the loan amount and lowering the LTV.

Monitoring LTV Over Time

  1. Regular Car Valuations: As the car depreciates, it’s essential to monitor its value. Periodic car valuations can help determine if the LTV ratio is improving or if refinancing or additional loan payments are necessary. Click here to schedule a professional appraisal of your vehicle.
  2. Refinancing Options: If the LTV ratio improves significantly or interest rates decrease, refinancing the car loan may be an option to secure more favorable terms.
  3. Paying Down the Loan: Making additional principal payments towards the loan can accelerate the reduction of the loan balance, generally leading to a lower and more manageable LTV ratio.


Loan-to-Value (LTV) ratio is a critical metric to consider when buying and financing a car. It influences loan terms, interest rates, and the overall cost of vehicle ownership. By understanding LTV and its implications, you can optimize your financing decisions and secure more favorable loan terms. Focus on factors that impact LTV, such as the purchase price, down payment, and trade-in value, to achieve a lower ratio. Regularly monitor the LTV over time, considering refinancing options and making additional payments to reduce the loan balance. With this knowledge, you can navigate the car financing process with confidence and make informed choices that align with your financial goals.

Now that we have an understanding of how LTV affects the car loan process and what the recommended guidelines are, let’s move on to the trade-in, an immensely important part of calculating LTV. Click Next to continue.