By: William Frazier
Have you ever wondered how lenders determine how much you will need to pay for a down payment? Did you know that the factors used to help determine down payment can also affect your interest rate on the car you are trying to buy? Well they do, and loan to value is the factor that affects these 2 areas of your next car purchase.
The loan to value (LTV) percentage is the amount a lender will give you towards the purchase of a car compared to the actual value of the car. This limits the total price of the car you want to buy can be valued at to get the loan. For example, if you want to buy a new car that is valued at $10,000 you will still need to pay for taxes, titles and license which could bring your total to $12,000. In order to account for this difference, most lenders will approve you for an amount above the price tag of the car so you can cover these costs.
Lenders have different LTV percentages they will give you based on the car you’re trying to buy, your credit history, and your income. In this situation, a lender would have to provide you with an LTV of 120% ($12,000/$10,000). An LTV of 120% is somewhat average with a good credit history in some cases it will be less than 100% or could go up to 150%.
It’s important to know that lenders only base the value of the car off of the MSRP or sticker price when the car is new or only 1-2 years old. Lenders determine the value of used cars based on either the Kelly Blue Book or NADA’s fair trade-in value for that particular car. So it doesn’t matter what the dealership says they are selling the car for, you need to know how much the lender says the car is valued at to see how much they will give you.
Since your lender is taking on more risk by approving you for more money than the asset securing the loan (the car) is worth you can expect interest rates to get higher the more your LTV rate increases past 100%. If the LTV a lender gives you ends up being less than 100% you will have to make up the difference in the form of a down payment. You will also need a down payment if the total price you get from the dealership exceeds the LTV the lender gives you.
You can check your credit score here with identity IQ for $1 if you want to see where you stand before you hit the dealerships.
William Frazier
NACC Certified Credit Counsilor
Clean Slate Credit
334-430-5296
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