How Does Loan-to-Value Ratio Impact Car Loan Refinancing?

If you’re considering refinancing your car loan, lenders will evaluate a variety of factors when determining whether you qualify for refinancing and what terms they will offer you. While your credit score, credit history and debt-to-income ratio are typically the most important factors impacting this decision, there is another criterion that will often play a major role in your ability to secure the best possible car loan refinancing terms – your loan-to-value ratio (LTV).

What Is a Loan-to-Value Ratio?

Your loan-to-value ratio is a metric that compares how much you owe on your car loan to the value of the vehicle. It’s expressed as a percentage and is calculated by dividing the loan amount by the value of your vehicle. You then take this figure and multiply by 100 to get the percentage figure used as your LTV.

For example, if you still owe $25,000 on your car loan and your vehicle is valued at $30,000, you would use this equation to calculate your LTV:

25,000 / 30,000 x 100 = 83.33%

A loan-to-value ratio that is below 100% means you owe less on your loan than the car is worth. A loan-to-value ratio over 100% means you owe more on your car loan than the value of your vehicle.

Why is My Vehicle’s Loan-to-Value Ratio Important?

In general, lenders are relatively risk averse. They don’t like offering loans that don’t provide sufficient protection in the event you default since this means they won’t get their money back. Your loan-to-value ratio provides the lender with an assessment of how risky the loan will be. They can use the LTV to determine whether or not they’re fully protected in the event that your vehicle gets totaled, or you default on your loan.

When you secure a car loan, the lender will use the vehicle as collateral. If you stop making payments and default on your loan, the lender will have the right to take possession of your car and sell it to recover the money they’re owed on your loan. Similarly, if your car is totaled in an accident, the lender will be able to recover the remaining amount owed on the loan from your insurance payout, provided the value of the vehicle (and therefore your payout) is higher than the amount you owe on your loan.

When your LTV is below 100%, the lender knows they will be able to recoup all their losses in the event that you default. When your LTV is above 100%, the lender knows that they are potentially exposing themselves to a financial loss if you default. When your LTV is 100% they are covered (at the moment), but they have no margin for error in the event that your vehicle depreciates faster than you’re able to pay down the loan.

How Does My Loan-to-Value Ratio Impact My Car Loan Refinance?

The lower the LTV, the lower the risk for the lender. When a loan is considered less risky, you will experience a variety of potential benefits:

• Greater likelihood of approval – Most lenders have established limits on the LTV they will deem worthy of financing. While this varies from lender to lender and typically is higher than 100%, a loan-to-value ratio that exceeds a lender’s upper limit may impact your ability to be approved for car refinancing. Keep in mind that this isn’t a hard and fast rule, since lenders evaluate other factors when determining whether to approve your refinancing application.
• Lower interest rate – Since a low LTV indicates a lower level of risk to the lender, you will often be able to qualify for lower interest rates. This will lower your monthly payments and save you money over the lifetime of the loan.
• No down payment requirement – If your LTV is over 100%, the lender may ask you to make a down payment to get the value of your refinanced car loan lower than the value of your vehicle. If your LTV is under 100%, you typically won’t be required to provide a down payment. However, you may still decide making a down payment is worthwhile in this situation since it will drop your LTV even lower, which may increase your chances of getting approved and receiving a more favorable interest rate.
• Less risk of negative equity – When the amount owed on your refinanced loan is higher than the value of your vehicle, you have negative equity in your vehicle (also referred to as being upside down on your loan). This situation creates greater risk for you since you may be required to provide a cash payment to cover the difference between the value of the loan and the value of your vehicle in the event your car is totaled in an accident.

How Do I Calculate My Loan-to-Value Ratio?

You can easily calculate your LTV using the following steps:

• Figure out your existing loan balance – You can find this figure by checking your most recent car loan statement or by logging into your account on the lender’s website.
• Determine the value of your vehicle – You can look up the value of your vehicle on one of the following websites: Kelley Blue Book, NADAguides or Edmunds. Keep in mind that the values you see on these websites are just a rough estimate. The actual value of your vehicle may be impacted by factors such as mileage (high mileage tends to lower the value) and the condition of your vehicle.
• Divide your loan balance by your vehicle’s value – Just as we did in the example above, divide the value of your existing loan balance by the value of your vehicle and multiply this figure by 100 to get the LTV.

Keep in mind that your LTV is only one factor used in determining your ability to get approved for refinancing and the specific loan terms you’ll be offered. You can get a clearer picture of how much you might be able to save each month by using our car refinance calculator.

What Is a Good Loan-to-Value Ratio for Auto Refinance?

In general, the lower your LTV, the better your chances of unlocking lower interest rates and more favorable loan terms. When lenders are considering car loan refinance applications, any LTV of 100% or lower is considered good. When your LTV is under 100%, it also means you’re less likely to become upside down on your loan as your vehicle continues depreciating, and this will lower the financial risks you face in the event your vehicle gets totaled.

Keep in mind that while LTVs above 100% aren’t considered good, they don’t prevent you from being approved for car loan refinancing. It’s common for lenders to approve refinancing applications with LTVs above 100%.

What Is a Bad Loan-to-Value Ratio for Auto Refinance?

In general, the higher your LTV climbs above 100%, the less likely you are to be offered the lowest interest rates and most favorable terms. That being said, you can still save money when you refinance a car loan with a high LTV.

While the upper LTV limits vary from lender to lender, most lenders will typically approve car loan refinancing even when your LTV is in the 120-125% range, and some may even approve refinancing when the LTV is 130%. In addition, other factors will impact the loan terms you qualify for. If you have a very high credit score, strong repayment history and low debt-to-income ratio, a higher LTV may not be as important to certain lenders.

In addition, you can always reduce your loan-to-value ratio by making a down payment when you refinance if your current LTV negatively impacts the savings you can achieve from refinancing.

iLending Makes Car Loan Refinance Easy and Hassle Free

If you’re tired of being saddled with a financially crippling car loan, it may be time to refinance. At iLending, we make car loan refinancing easy and hassle free. Our exclusive You First Approach™ has been designed to create a great experience for you at every phase of the process.

As part of our unique approach, you’re paired with a loan consultant who will put in the time necessary to learn about your goals for refinancing. This discussion will inform the loan options we recommend. Your loan consultant will compare loans for you by leveraging our vast network of over 50 nationwide lenders. We’ll identify the solutions that align best with your specific needs, review these with you, answer any questions you have, and help you determine the best option to achieve your refinancing goals.

Once you’ve chosen a loan, we’ll handle the entire process for you. We’ll help you fill out all the paperwork to ensure it’s done correctly. After you’ve been approved, your loan consultant will also follow up with the existing lender to ensure your current loan is paid off. With our You First Approach™, you have peace of mind that the process is handled correctly, all important actions have been taken, and you’ve received the best loan for your specific needs.

On average, iLending customers save $145/month when they refinance a car loan with us. This monthly savings can have a significant impact on your life, infusing much needed cash into your budget that you can use to pay off debt, grow your savings, or just give you the additional cushion necessary to breathe easier knowing your finances are in a better place.

Apply now to get the car loan refinance process started.

What would you do with an extra $148* in your pocket?