Loan to value, often shortened to LTV, is a term you may come across in car finance. Simply put, it compares how much you’re borrowing to how much the car is actually worth.
Lenders use it to understand the level of risk involved to them, but you could also use it to get a clearer picture of how good a deal is for you. It can be confusing, so we’ve covered everything you need to know about LTV on a loan, including how LTV works, why it matters and how to calculate it.
Understanding LTV meaning: what does it stand for?
LTV stands for loan to value. It’s a percentage you get when you compare the amount you’re borrowing with what the car is currently worth.
Lenders use it to judge how risky the loan might be. A lower LTV is usually better because it shows the lender you’re borrowing a smaller share of the car’s worth, which could make it easier to get a lower interest rate.
That’s why it’s important to understand how LTV works whether you want a PCP or a HP finance deal.
Why LTV matters in car finance
LTV plays a big role in car finance. Here’s why it matters:
Loan approval: Lenders usually have a maximum LTV they’re willing to accept. Depending on your credit history, they might set an even stricter limit. If your LTV is too high, your application could be declined.
Deposit: If your LTV is above the lender’s preferred level or you want a lower interest rate, you might need to increase your deposit. This reduces the LTV and could improve your chances of approval and better terms, subject to status.
Interest rates: Loans with a high LTV may be considered riskier because the lender may recover less if the car is written off or repossessed. This often means a higher interest rate.
Negative equity: High LTVs could increase the risk of negative equity. Negative equity happens when your loan amount is higher than the car’s current value. This may make it harder to sell or trade in the car without paying off the extra amount first.
How LTV can change
LTV isn’t fixed. As you make repayments and the car loses value over time, your LTV can change. It’s worth bearing in mind that new cars tend to drop in value quickly in the first few years, which could increase the LTV.
Also, if you carry any remaining loan from a previous car into a new agreement, that may also push your LTV higher.
How to lower LTV and reduce risk
To try and reduce the risk of owing more than your car is worth:
● Consider cars that hold their value well.
● Save a bigger deposit before applying if you can.
● Avoid rolling over old debt into a new loan.
● Make extra repayments if you can.
How to work out LTV percentage
You can work out how to calculate loan to value in a few steps:
Find out your loan amount: For a new agreement, this is the amount you want to finance. For an existing loan, check your latest statement or online account to see what you still owe.
Get an accurate car valuation: Next, find out how much your car is currently worth, not the original sale price. Use a trusted valuation guide to get this.
Divide the loan amount by the car value: Divide the loan balance by the car’s value to see the basic loan to value ratio.
Multiply it by 100: Times that ratio by 100 to get your LTV in an easy to understand percentage format.
The formula looks like this: Loan amount ÷ Car value x 100 = LTV%
The takeaway
Understanding loan to value can help you understand the car finance process a lot easier. Once you know how to calculate loan to value, you can work out how much you’re borrowing compared to the car’s value and get an indication as to whether your loan is likely to be approved, what interest rate you might pay, and what deposit you might need.
Ready to look at your car finance options? Get a quote today to get started. For more helpful tips and information, check out more of our guides.
Disclaimer: Car Finance 247 Limited is a broker, not a lender. Finance is subject to status and affordability and is not guaranteed. No financial advice is provided. Always read the terms and conditions carefully before applying.