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Loan-To-Value Ratio and Car Loan Refinancing

  • Auto Refinance
  • Vanessa Norris
  • 9 minutes

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LTV is something that you might often hear when you are refinancing your auto loan. But what is the loan-to-value ratio (LTV)? How does it impact your auto refinancing? Read to know more.

What is the loan-to-value ratio? 

A loan-to-value (LTV) ratio is basically an assessment of lending risk. Prior to loan approval, lenders deliberately evaluate your LTV. In general, loans with high LTV ratios are regarded as higher-risk loans. You will be expected to pay a high-interest rate on the loan if you have a high LTV. In addition, a loan with a high LTV ratio may necessitate that the borrower purchase mortgage insurance to reduce the lender’s risk. This insurance is referred to as private mortgage insurance (PMI). 

Loan-to-value (LTV) ratio and Combined loan-to-value (CLTV) ratio 

The LTV ratio of a mortgage defines the proportion of the property’s value to the outstanding mortgage balance. Similarly, a property’s combined loan-to-value (CLTV) ratio describes a similar calculation but includes the entire amount of all loans taken out on the property. 

In the latter instance, this means that additional mortgages or loans, such as home equity loans and home equity lines of credit (HELOCs), must be considered. Your mortgage lender will consider both LTV and CLTV ratios when determining your loan eligibility. 

How to calculate your LTV ratio 

Figure out your loan balance  

Visit your lender’s website or go through your most recent loan statement and get the numbers. 

Determine the asset’s market value 

Websites like Kelly Blue Book and Edmunds are super helpful for calculating your asset’s market value. In the case of houses, an appraisal is necessary. Still, you can get an approximate estimate online. 

Do the math  

Divide your loan balance by the value of your asset. Multiply this ratio by 100 to convert it to a percentage. And what you get is your LTV. 

How much equity is required in a car to refinance? 

Once you have determined your LTV, you can evaluate the loan amount you wish to request. However, various mortgage types have different LTV maximums, so find your mortgage type below to determine if your home equity is eligible for refinancing or a home equity loan. 

What LTV ratio is required to refinance your car? 

If you have plans to refinance and get the best out of it, your LTV ratio should be 80% or less. If your LTV is 80%, you have 20% equity in your home. However, if you have a conventional mortgage, you may be able to refinance with an LTV of up to 97%. If you refinance into a standard mortgage with an LTV ratio of more than 80%, you’ll have to pay PMI. You will probably also have to pay a higher interest rate to your provider. 

When your refinancing is backed by the government, the LTV ratio rules are less strict. With an FHA mortgage, your ratio can go as high as 97.75%, and with a VA or USDA mortgage, you can refinance even if you have no equity in your house. Know that the LTV ratio is the only deciding factor. 

Monthly payments getting unmanageable? Try refinancing. With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan.

What is a good loan-to-value ratio for auto loan refinancing? 

In short, the smaller the price, the better. For car refinance loans, a good LTV is anything that is 100% or less. If your LTV is low, you have a better chance of getting good loan terms, like a lower interest rate and a lower monthly payment.  

It also means that you have more value in your car and are less likely to be upside down on your new car refinance loan over the life of the loan. Even though an LTV of more than 100% isn’t good, it doesn’t mean you can’t get a refinance loan.  

What is a bad loan-to-value ratio for auto loan refinancing? 

As you might guess, the higher the number, the worse it is. But, if your LTV is high, it doesn’t mean that you won’t get approved. Some lenders will agree to LTVs that are higher than 130%, but they are more likely to look at the car’s trade-in value. When you trade in your car for another model, the dealership will give you a price for it.  

Retail value is a lot higher than trade-in worth. Again, know that LTV is not the only constraint. Lenders have different preferences. Some lenders may offer loans with a higher LTV percentage. But they usually require a better credit score, a lower debt-to-income ratio, or less favorable terms. 

How does an LTV ratio affect your car loan? 

Since your car is used as security for the loan, lenders think about whether they could sell it to compensate for their losses if you don’t pay back the loan. The less you borrow compared to how much the car is worth on the market, the less risk there is for the investor and the more you stand to gain. The loan-to-value ratio can influence so many things. Such as: 

Loan approval 

Lenders have LTV ceilings for loan approval that vary from lender to lender. This is to reduce their risk. If your LTV is higher than what the lender will allow, it could affect your ability to get a loan. Remember that LTV is just one of many things that lenders look at when choosing whether or not to give you a loan. They also look at your credit score and history of making loan payments on time. 

Lower loan rate 

LTV is how lenders determine the intensity of your loan’s risk. So, a lower LTV means less risk, which usually means a lower loan rate.  

Down payment 

If you put more money down on a loan, your loan-to-value (LTV) will go down. This will increase your chances of getting the loan and get you a lower interest rate. 

Negative equity 

Some lenders will let you borrow more than the estimated retail price of a new car or the market value of a used car. This is negative equity. The car will be worth less than you owe, which is not good. 

Rate of interest 

Most of the time, lenders will give you a lower interest rate if your LTV ratio is low. A lender may accept your application even if your LTV ratio is high if the rest of your finances look good. The company could still possibly charge you a higher interest rate, which will cost you more and rob you of your opportunity to save. 

How lenders use your LTV ratio 

An LTV ratio is just one of the things that lenders look at when deciding who can get an auto loan refinance. But it can make a big difference in the interest rate that a borrower can get. Most lenders give the lowest possible interest rate to people who want to refinance when their LTV ratio is at or below 80%. 

Borrowers can still get to refinance even if the LTV ratio is high, but the interest on the loan may go up as the LTV ratio goes up. A loan is more likely to be accepted, and the interest rate is likely to be lower if the LTV ratio is lower. Also, it’s less likely that you’ll have to buy private mortgage insurance (PMI) as a borrower. 

Even though it’s not a rule, almost all borrowers require a loan-to-value ratio of less than 80% to avoid paying PMI. There are sometimes exceptions to this rule for people who make a lot of money, have low debt, or have a lot of investments. 

How to improve your LTV ratio before refinancing 

If you want to improve your chances of getting a car to refinance a loan or get better terms, you might want to lower your loan-to-value ratio. Your LTV is made up of two parts: your loan and the value of your asset.  

To lower your LTV, you would need to either lower your loan or raise the value of your assets. Paying down your current loan is the easiest way to reduce your LTV. Once you do, you’ll better get the best rates when you refinance your current loan.  

Loan-to-value ratio | Way.com helps you save around $1850 on your auto refinance

Bottom line 

The loan-to-value ratio is a key number to keep an eye on. If you plan to refinance your car loan, your LTV will be a factor in whether or not a bank will give you money. You could pay down your loan or buy an older model that costs less. That will lower your LTV, giving you a better chance of getting a refinance loan with a lower monthly payment and a better interest rate. 

FAQs 

What does a 70% LTV mean? 

A loan-to-value (LTV) ratio of 70% shows that the amount borrowed is equivalent to 70% of the asset’s value. In the case of a mortgage, it means that the borrower has put down 30% and is financing the balance. 

How to calculate the LTV ratio for refinancing

Loan-to-value (LTV) is easy to calculate. Just divide the loan amount by the worth of the asset or collateral that is being used as security.  

What is the max LTV for refinancing? 

The loan-to-value ratio is a way for lenders to determine how much of a loan they should give. Most of the time, the highest loan-to-value ratio for a mortgage is 80%. Higher loan-to-value ratios may mean that the borrower must buy insurance to protect the lender or that interest rates will increase. 

What does LTV mean in refinance? 

Loan-to-value (LTV) is a ratio often used in mortgage loans to determine how much of a down payment is needed and whether a lender will give a borrower credit. Lower LTVs are better from the lender’s point of view, but they require customers to put down more money. 

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