When you apply for a car loan, the lender will consider the value of the car, as well as your creditworthiness, to determine the terms of the loan, including the interest rate, repayment period, and loan amount.
Your entire amount of borrowing for the automobile is known as the loan amount.
The LTV ratio is the loan amount divided by the value of the car.
For example, if you’re purchasing a car that is valued at $20,000 and you’re seeking a loan of $16,000, the LTV ratio would be 80%.
This means you’re borrowing 80% of the car’s value and using the vehicle as collateral to secure the loan.
LTV is an important factor that lenders consider when approving a car loan because it helps them assess the risk of lending money.
The higher the LTV ratio, the greater the risk for the lender, as there is less equity in the collateral to offset potential losses if the borrower defaults on the loan.
Therefore, lenders may charge higher interest rates for loans with higher LTV ratios to compensate for the increased risk.