Auto lenders use this ratio to assess the risk of the loan for which you may be applying, and this can have a large impact on what your insurance rates may be and your monthly payments.

Your loan-to-value (LTV) ratio is typically assessed alongside your credit score when you initially apply for a loan. The lower your LTV ratio, the better!

It can be difficult to understand what your LTV ratio may mean, but

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—the

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Continue reading to learn more about loan-to-value ratios, how to calculate your own, and what your ratio may mean for you.

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What is a loan-to-value ratio?

An LTV ratio is the amount of your

car loan

divided by the value of your asset, which—in this case—is your vehicle.

The ratio is expressed as a percentage and notes how much of the loan is backed up by real-world value.

MORE:

How to determine the retail value of your used car

How to calculate your loan-to-value ratio

Once you know the equation for calculating your LTV, then finding your ratio should be simple!

Your LTV = Loan Amount ÷ Car Value

For example, if you borrow $15,000 to purchase a $15,000 vehicle, your LTV will be 100% (100% = $15,000/$15,000).

But if you had to borrow $25,000 for a $20,000 car, then your LTV would be 125% (125% = $25,000/$20,000).

LTV ratio requirements will differ depending on your loan, but you should ideally aim for no more than 80%.

Why your loan-to-value ratio is important

If you have a higher loan-to-value ratio, it can mean the following:

You might get denied for refinancing

You can see higher interest rates

You’ll have higher monthly payments

You could end up with less equity in your asset

If you have a lower loan-to-value ratio, then it can benefit you in the following ways:

You could receive better interest rates

You’ll have lower monthly payments

You can build more equity in your asset

MORE: How to calculate total interest paid on a car loan

How to lower your loan-to-value ratio

There are a few ways to lower your loan-to-value ratio, which can ultimately help you save money on your car.

You can start by borrowing less money initially. If you don’t have enough money to make a larger downpayment, then it might be worth waiting a bit and saving up before diving into an auto loan.

Increasing your monthly payments and working to pay your loan off more swiftly can also help to lower your LTV ratio.

Getting a good deal on car insurance

If you are stuck with a high loan-to-value ratio and have hiked interest rates as a result, then you might want to look for other ways to save—like on car insurance.

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They even help cancel your old policy! Basically, you get all the savings and coverage, with none of the usual hassles.

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