Loan to Value ratio is the loan amount against the present market value of the car considered for purchasing. LTV is a way to measure the risk of the loan which is important to calculate before applying for a car loan both for the lender and the borrower. Usually, the original value of the car is lesser as compared to the price you are paying at the time of buying a car. The reason is that car is a depreciating asset that lost its original value, the moment it is drive off from the showroom. Its value goes down each passing year.
The Process to calculate LTV for a Car loan:
If you are purchasing a car with the help of a car loan, there are certain things that a buyer must do beforehand. Among all, one of the most important is the calculation of LTV. To make the understanding of this process easier for you, here is the simple formula for finding out the LTV of a car loan. Here is the formula of how you can calculate the LTV of your car loan-
LTV= Loan Amount/car value
The LTV of a loan is expressed in the form of a percentage. Suppose you are going to buy a car of Rs.5 lakh and for that, you have borrowed a car loan amount of Rs.5 lakh. In this case, your LTV will be 100% (Rs.500000/Rs.500000).
Instead, if you are applying loan of Rs.2, 50000 for buying a car worth Rs.2, 00000, the LTV of your loan will be 125% (Rs.2, 50000/Rs.2, 00000).
Why lenders calculate LTV
The financial institutions including banks, NBFCs, and third-party portals lend money to the borrowers with an expectation that they will repay the money on time. In case, the borrower is not able to pay the money back, then it is a loss for the lenders. To safeguard for themselves from the risk of NPA or defaults, the lender prefers to take collateral before approving a car loan. The reason for taking the collateral is that the lender wants to cover off his or her risk so that he or she can repossess the collateral and sell it off when the borrower makes a loan default.
In the case of car loans or auto loans, the collateral is the car itself against which the loan is taken. But here taking security against the car loan does not limit the risk of a lender. Usually, a borrower borrows more than the exact price of a car for varied reasons. Some borrowers use the extra money borrowed to pay off their existing debts, some others finance protection products in their loans. Due to this, the lenders often end up approving more money as a loan against the car whose worth is lesser than the loan amount. In such a situation, when the borrower makes a loan default, the lender fails to fetch the money that he has given to the borrower resulting in a loss.
To avoid being in such a situation, the lender fixes LTV for a car loan. By setting an LTV they ensure that they in no way get exposed to a high amount of risk while providing a car loan.
The procedure to reduce LTV of your car loan
The LTV is the total value of the loan divided by the present market cost of your vehicle. The lender who is providing the loan will seek to offer a loan amount less than the cash value of your car. If the loan amount exceeds the car market value, then the lenders will be exposed to a huge risk at the time of loan default. The lender to get financially safe, prefer only those loan applicants who are paying higher down payment as it helps in reducing the loan to value ratio of your car loan.
How does LTV of a Car Loan work?
LTV is one of the most important factors that every car buyer should be aware of in advance to avail of the best car loan offers.
Here is an example which will help you to clearly understand how Loan to Value of a car loan works.
Cost of the car- Rs 500,000
You are liable to pay - Rs 15,00,000 of debt from an existing loan and you want to purchase a service protection product worth Rs.50,000.
For all this borrowing amount Rs 500,000 will not suffice, and you need a loan higher than the purchase cost.
The total amount you need adding with the extra Rs.1,5 lakh for negative equity and Rs.50,000 for protection products will sum up to Rs.7 lakh.
It means the LTV will 110%, and you need to apply for a car loan from a lender who offers such a high loan amount. There are online many lenders and banks that can provide you high car loans at this high LTV. But many lenders take this as a risk in case you are not able to repay the loan amount, and they will only get the current market value of your car then. It means that the additional 10% of the amount paid to you will be at risk.
Now assume that no lender agrees to approve your loan at 110% LTV. In such cases, you need to make a down payment so that the LTV ratio becomes 100%. Particularly in this case, if you make a down payment of 10% of the loan, the LTV of the loan will come down to 100%.
Effect of Loan to value ratio on borrowers
The loan to value can affect the car loan terms and conditions. While the borrower can enjoy flexible loan terms in case of a low LTV. In case of a high LTV, the bank might ask the borrower to make a down payment to reduce the LTV. Usually, banks don’t ask for any down payment while offering a car loan. But if the LTV is high, to reduce the associated risk, the lenders might ask for an initial down payment.
The Loan to Value is one of the key aspects that are associated with a car loan, and the borrowers need to be well-informed about this to get the best deals on car loans. So, it is a must to understand the LTV and making use of your knowledge while opting for a car loan.