Loan To Value Ratio Formula

Loan To Value Ratio Formula

Mya is buying her first car and is looking forward to the day when she has her own freedom to travel all over the country. She cannot afford to buy a car in cash, so she will be applying for a car loan. For the past year she has ensured that her credit record is impeccable by paying her credit card on time, and has paid all of her accounts. 

She is aware that in addition to her creditworthiness and affordability, another important factor will be whether or not she has a significant deposit amount.  

Loan to value ratio formula: 

Loan Amount / Value of property or car 

The ratio is expressed in percentage form. 

This formula is regarded as a lending risk assessment ratio because it is typically used by lenders to assess how much risk is involved. 

High LTV ratios mean higher risks. A percentage of below 80% is likely to result in the lowest possible interest rates. So if Mya’s deposit amount is more than 20% of the value of the car, then the bank will regard her as a low risk. 

If the LTV ratio is beyond the lender’s guidelines, a higher down payment may be required. Lenders set maximum LTV rates. 

Knowing how the loan to value ratio formula works is important because it will help Mya set her maximum budget and expected down payment. 

A higher ratio means that the lender is taking more risk. A high LTV also means that interest rates are higher for the borrower.  

A lower LTV ratio means that you’re putting more money down and are effectively borrowing less when purchasing. Mya should aim to achieve this when she plans for her car finance application.

Categories: Financial tips