When you’re in the market for a new set of wheels, understanding how car loans work is crucial. One key concept that often comes up is the loan-to-value or LTV ratio. But what exactly does this mean, and why does it matter? Let’s break it down.
What is Loan-to-Value (LTV) Ratio?
In simple terms, the loan-to-value ratio compares the amount you’re borrowing to the value of the car you’re purchasing. It’s calculated by dividing your loan amount by the car’s value and multiplying by 100 to get a percentage.
For example, let’s say you’re eyeing a sleek sedan valued at ₹8 lakh. If you take a loan of ₹6 lakh, your LTV would be:
(₹6,00,000 ÷ ₹8,00,000) x 100 = 75%
The higher your down payment, the lower your LTV will be. A personal loan from Airtel Finance could help you put together a larger down payment and secure a lower LTV.
Why LTV Matters for Your Car Loan
When applying for a car loan, the Loan-to-Value (LTV) ratio is a crucial metric that lenders use to assess both risk and eligibility. Understanding how LTV influences your loan approval, interest rates, and monthly payments can help you make smarter financial decisions.
1. Lender’s Risk Assessment
From a lender’s perspective, the LTV is a key indicator of risk. A higher LTV means you’re borrowing a larger portion of the car’s value. If you were to default on the loan, the lender might not recover their full investment by selling the car.
On the flip side, a lower LTV signals less risk for the lender. If you’ve made a substantial down payment, even if the lender has to repossess and sell the car, they’re more likely to recoup their money.
2. Loan Approval and Interest Rates
Because of this risk factor, lenders often have maximum LTV thresholds for approving car loans. These typically range from 80% to 90%. Some lenders might stretch to 100% or higher for well-qualified borrowers, but this is less common.
Your LTV can also impact the interest rate you’re offered. Generally, a lower LTV could translate to a lower interest rate, as the lender sees you as a lower-risk borrower. Check your credit score to see where you stand—a strong score combined with a low LTV could snag you the best rates.
| LTV Range | Potential Impact on Loan Terms |
| 60-80% | Easier approval, lower rates |
| 80-90% | Good approval odds, average rates |
| 90-100%+ | Tougher approval, higher rates |
3. Down Payment and Monthly Installments
As we saw earlier, your down payment directly affects your LTV. But it also impacts your monthly car loan EMIs. The more you put down upfront, the less you need to borrow, which means lower monthly payments.
Let’s revisit our ₹8 lakh car example. If you make a down payment of ₹2 lakh and take a 5-year loan at 10% interest for the remaining ₹6 lakh, your monthly EMI would be around ₹12,748.
But if you could increase your down payment to ₹3 lakh, you’d only need to borrow ₹5 lakh. This would drop your EMI to about ₹10,624, a savings of over ₹2,000 per month!
Managing Your Car Loan LTV
Effectively managing your Loan-to-Value (LTV) ratio can lead to more favourable loan terms and help you avoid long-term financial strain. From planning your down payment to staying ahead of depreciation, smart strategies can keep your LTV in check throughout your loan journey.
1. Plan Your Down Payment
As you prepare to buy a car, plan your down payment carefully. Aim to put down at least 20% of the car’s value to keep your LTV in a favourable range. Remember, a larger down payment means a lower loan amount, lower LTV, and potentially better loan terms.
If you’re falling short, consider taking a personal loan to bridge the gap. Check your personal loan eligibility and required documents to see if this could work for you.
2. Be Mindful of Negative Equity
In some cases, your LTV might exceed 100%. This often happens if you’re rolling over a balance from a previous car loan or wrapping taxes and fees into your new loan. This scenario, known as negative equity, means you owe more than the car is worth.
While some lenders allow this, it’s generally best to avoid starting out with negative equity. If you had to sell the car or if it was totalled in an accident, you’d still owe money on the loan even after the car is gone.
3. Stay On Top of Depreciation
Cars lose value quickly, especially in the first few years. If you start with a high LTV, depreciation can rapidly widen the gap between what you owe and what the car is worth. This can make it harder to sell or trade in the car without coming out behind.
To safeguard against this, make a solid down payment to keep your initial LTV low. You could also opt for a shorter loan term. While this means higher monthly payments, you’ll pay off the loan faster and build equity in the car more quickly.
Key Takeaways
Understanding the loan-to-value ratio for car financing is a crucial step in navigating your borrowing journey. By grasping how LTV impacts your loan approval, interest rates, and down payment requirements, you can make informed decisions and steer towards a successful car purchase.
At Airtel Finance, we understand the importance of finding the right loan fit. Our flexible personal loan options, competitive interest rates, and easy eligibility criteria make financing your used car a breeze. Plus, you can check your credit score for free and get exclusive offers through the Airtel Thanks app. Start your loan journey with us today and drive away in your dream car!
Ready to start your car-buying journey? Download the Airtel Thanks App to check your loan options and take the first step today!
FAQs
- What is a good LTV for a car loan?
Ideally, aim for an LTV of 80% or lower. This means making a down payment of at least 20% of the car’s value.
- Can I get a car loan with a high LTV?
Some lenders may approve loans with LTVs up to 100% or higher for well-qualified borrowers. However, a high LTV often means less favourable loan terms and higher interest rates.
- How does LTV affect my car loan interest rate?
Generally, a lower LTV could help you secure a lower interest rate, as lenders perceive you as a lower-risk borrower. Check your credit score to see how you might fare.
- What happens if I have negative equity in my car?
Negative equity means you owe more on your car loan than the car is worth. This can make it difficult to sell or trade in the vehicle without having to pay the difference out of pocket.
- How can I avoid starting with a high LTV on my car loan?
Plan to make a substantial down payment, ideally 20% or more of the car’s value. You could also consider a personal loan to increase your down payment and lower your LTV.
