Used Car Loan-to-Value Explained: Why LTV Changes Your Rate

Loan-to-value, or LTV, is the amount you borrow divided by what the lender says the car is worth, shown as a percentage. Borrow $18,000 on a car valued at $15,000 and your LTV is 120%. The CFPB describes LTV as a key number lenders use to judge risk, and on a used car it can decide if you are approved, what rate you get, and how long you will owe more than the car is worth.

How lenders figure the value side

Lenders usually value a used car from a pricing guide using year, make, model, trim, mileage and options. Some use the lower of that guide value or the purchase price. The guide assumes a typical car. It does not know the car was in a crash, had a flood claim or carries a rebuilt brand, unless the lender learns about it from the title or a report. That is where buyers get caught: you negotiate a price on a car with a history problem, and the lender or a later buyer values it lower than you paid.

The borrowed side includes more than the price. Taxes, registration, dealer fees, service contracts, gap coverage and any negative equity rolled in from a trade all add to the loan, and all push LTV up. A car with a $15,000 value can carry a $19,000 loan once those are added.

Why LTV changes your rate and approval

Many lenders price loans in LTV bands, with lower rates for lower LTV, and set a maximum LTV they will lend. High LTV means the lender has less cushion if the car is repossessed and sold. When you apply, a lender may approve you but cap the amount, ask for more down, or offer a higher rate. Credit unions and banks publish their exact bands inconsistently, so ask the lender directly.

Negative equity, the long tail of high LTV

When you owe more than the car is worth, you have negative equity. The CFPB's negative equity explainer warns that rolling it into the next loan makes the next loan bigger. If the car is totaled, insurance pays the actual cash value, not your balance. Our posts on negative equity at trade-in and gap insurance on a used car cover what happens then.

How history affects LTV

A car with a reported accident or a branded title often sells for less than a clean twin. If you paid clean-car money, your LTV is really higher than the paperwork shows, because the market value is lower than the guide value. Some lenders refuse branded titles or cap LTV on them; read financing a rebuilt title car and credit union salvage title loans if that applies. Check the title against NMVTIS and read the report's accident and title sections before you agree on a price, using our how to read a CARFAX report guide.

Ways to keep LTV down

• Put more money down, even a few hundred dollars.
• Pay taxes and fees in cash rather than rolling them in.
• Skip or shop add-ons such as service contracts, which can often be bought later.
• Avoid rolling in negative equity from a trade if you can wait.
• Choose a shorter term, which builds equity faster.
• Negotiate price using the car's real history, not the guide value of a clean one.

A quick example

A buyer finds a car valued at $16,000. The price is $16,500, taxes and fees add $1,500, and a service contract adds $2,000, for a $20,000 loan with nothing down. LTV is 125%. With $2,000 down, taxes paid in cash and no service contract, the loan is $14,500 and LTV is about 91%. Same car, very different risk and, often, a different rate. The second buyer also reaches positive equity much sooner. The figures here are illustrative; your lender's valuation and limits will differ.

Prepayment and LTV

Paying extra principal lowers LTV faster. Check for a prepayment penalty first; most credit union auto loans do not have one, but some loans do. Our car loan prepayment penalty post explains what to look for.

What the report costs

The history report is what tells you whether the guide value your lender uses is the real value of the car. A single CARFAX bought direct has usually listed around $44.99 this fall, with AutoCheck in a similar range. We are a licensed CARFAX and AutoCheck reseller, not affiliated with CARFAX, AutoCheck or Experian; guest pricing here has run about $5.50 a report, members about $4.50, with bundles priced per pack. Those numbers change, so confirm the price at checkout before you pay.

Sources

• CFPB: loan-to-value ratio
• CFPB: negative equity
• CFPB auto loan resources
• NCUA, regulator of federal credit unions
• NHTSA vPIC VIN decoder, to confirm the year and trim a lender values