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What's the loan-to-value ratio on a car?
I was reading about car loans, and I discovered that the loan-to-value ratio is an important part of car loan approval. What is a car’s loan-to-value ratio?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
The loan-to-value ratio is definitely one vital part of your
car loan
, right up there with your credit score and debt-to-income ratio. Simply put, the loan-to-value (LTV) ratio is the amount borrowed compared to the actual cash value (ACV) of the vehicle.The LTV ratio is important because it represents the risk of an individual compared to lending it to an asset. If you want to finance a car but you also want to cash out on top of it, you may get an LTV ratio that’s higher than 1.
For example, let’s say you want to purchase a vehicle that’s $20,000. However, you also want to get $2,000 cash out on top of the vehicle, but the vehicle itself is only worth $20,000. In this instance, your LTV ratio would $22,000 to $20,000, which equals 1.1, or 110%. Therefore, if you were to default on your loan, the lender wouldn’t be able to recruit the extra cash.
Unless you have stellar credit, you’re usually confined to an LTV ratio of 100%, meaning the lender won’t give you more money than the car is worth. However, qualified borrowers can often get up to 110% or 120% of the value of the underlying asset—in this case, a vehicle.
That said, getting a loan with an LTV ratio over 100% is also risky for the borrower, as the loan is automatically
upside down
and remain so for an extended period of time.Regardless of the LTV ratio on your car loan, don’t forget that you’re also going to need car insurance for the duration of your loan, which is another added cost. However, you can get the best value by comparing customized quotes from over 50 car insurance companies with the
Jerry
app. Sign up today in just minutes.View full answer
- Gregory R.
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Jerry partners with more than 50 insurance companies, but our content is independently researched, written, and fact-checked by our team of editors and agents. We aren’t paid for reviews or other content.
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