Calculating LTV, and What it Means for Bad Credit Car Loans

LTV stands for loan to value. This is a calculation auto lenders do to help them asses risk. The higher the LTV, the more risk there is to the lender. So, if you have bad credit and are looking for an auto loan, you should take a close look at LTV before you choose a vehicle. We can show you how to determine loan to value ratio, and why it's important.

What Is a Loan to Value Ratio?

Calculating LTV, and What it Means for Bad Credit Car LoansWhat a loan to value ratio shows is the comparison between how much you're borrowing and the value of the asset – so, comparing your loan amount to the car's value, in the case of an auto loan.

Because the higher the LTV ratio, the riskier the loan, lenders typically don't approve loans with a vehicle LTV over 115% of invoice (new) or book value (used) for bad credit borrowers.

Calculating the LTV Ratio

To calculate the LTV of a car you're thinking about financing, divide the vehicle's selling price by its book value. The closer these are, or the higher the book value compared to selling price, the better off you're going to be.

Remember, car values (and accompanying mileage tables) are determined by which vehicle valuation guide, or book, the lender uses: Kelley Blue Book, NADA, and/or Black Book.

The Importance of Loan to Value

It's important to know about LTV as it pertains to auto loans because lenders determine overall loan risk by maximum LTV. It’s also true that a vehicle with more than 100% LTV has negative equity.

Negative equity is common because cars are constantly depreciating. The steep loss of value – especially with new vehicles – typically leads to borrowers being underwater at the beginning of a loan.

As the loan balance drops, you need to make sure that your car maintains a value that’s as high as possible in order to build equity sooner. To help maintain value in your vehicle, make sure you take good care of it with regular maintenance and upkeep.

In order to reduce your car’s LTV, you can start by making a large down payment. The larger your down payment, the less you have to borrow. This means you start the loan with a lower LTV.

Negative Equity: Bad for Bad Credit

Negative equity affects your chances of trading in a vehicle. If you owe more on your loan than a dealer or buyer is willing to offer you, you have to make up the difference in cash. If you can’t do this, you may have to wait until your car's LTV is lower – meaning you can sell it or trade it in for as much, or more, than the loan balance. A last option, in some cases, is to roll the negative equity into your next loan, but this isn't recommended and isn't always possible with bad credit.

If you find a lender that allows this, you start your next loan with an even higher LTV. This is because you're adding the negative equity from the old loan to the new loan balance, raising the LTV of the new loan. The higher the LTV, the harder it's going to be to get out from under negative equity. This could start you on a 'trade-in treadmill' where you never get any equity value out of a vehicle.

Finding a Vehicle and a Dealer to Meet Your Needs

Now that you can see the importance of LTV, you should think of purchasing a car with a high resale value. Vehicles that hold their value – Toyota, Honda, Subaru, and Kia, for instance – are good models to look at when you're considering an auto loan.

These brands make affordable new cars, and they hold their value well enough to be considered good used vehicles, too. Additionally, if you have poor credit, a used car or a certified pre-owned vehicle that's already seen its steepest drop in depreciation can make it a good value.

The next thing you need to do as a bad credit borrower is find a lender that can work with your credit situation. That's where we can help. At The Car Connection, we work with a nationwide network of special finance dealerships that have the lending resources to get you the auto loan you're looking for.

Simply fill out our easy and hassle-free car loan request form to get started now, and we'll begin the process of connecting you to a local dealer.


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