Understanding 'loan-to-value' ratio when taking a used car loan

When availing a used car loan, the Loan-to-Value (LTV) ratio is an important factor to consider. The LTV ratio indicates the proportion of the car’s value that the lender is willing to finance. For both the lender and borrower, this ratio acts as a financial risk indicator. While borrowers benefit from understanding how much they need to pay upfront, lenders assess how much risk they are exposed to with regards to a loan default. Hence, knowing the LTV ratio is key to making an informed borrowing decision.

Understanding the LTV of a used car loan

The Loan-to-Value (LTV) ratio in banking refers to a percentage that reflects the relationship between the loan amount and the market value of the vehicle. Here is how you can calculate the loan-to-value ratio:

LTV = (Loan Amount ÷ Car’s Market Value) × 100

For instance, if a used car is valued at ₹5,00,000 and the bank offers a loan of ₹4,00,000, the LTV ratio is 80%. This means the borrower must pay ₹1,00,000 as a down payment. You can manually calculate the LTV ratio using the above formula, but it may be time-consuming and prone to error. For a precise calculation, use the online loan to value calculator offered by IDFC FIRST Bank.

Let us consider the example of LTV with IDFC FIRST Bank’s used car loan:

Suppose you wish to buy a pre-owned car valued at ₹6 lakhs. IDFC FIRST Bank offers you a used car loan with an LTV of 150%. This means you are eligible for a loan of up to ₹9 lakhs (₹6 lakhs x 150%). You can use ₹6 lakhs to purchase the car and the remaining ₹3 lakhs as additional funds for expenses like insurance, servicing, or personal needs. A higher LTV benefits you by offering more liquidity while securing the loan against the car’s value.

Why is the loan-to-value ratio important?
 

The loan-to- loan-to-value ratio is an important consideration for both the borrower and the lender for the following reasons. 

Borrower’s affordability:

 A high LTV means low down payment, making it easier to purchase a car without large upfront expenses.

Lender’s risk assessment:

 LTV helps lenders evaluate how much risk they are taking by financing a borrower’s used vehicle purchase.

Interest rates:

 Higher LTV may lead to higher interest rates as it increases the lender’s risk.

Loan approval and tenure:

 A favourable loan to value ratio for a used car can increase the chances of approval and allow for a longer repayment tenure.

How to improve your loan-to-value ratio?
 

Achieving a higher loan-to-value ratio can benefit you in several ways. Here is how you can improve your used car loan-to-value ratio.

Choose a high-value car:

 Opt for a car that holds a good resale value and is in good condition.

Maintain a strong credit history:

 A good credit and repayment record improves your loan eligibility.

Make a higher down payment:

 Offering a higher down payment lowers the loan requirement, enhancing your LTV ratio.

Add a co-applicant:

 Including a co-applicant with a stable income can improve your loan terms and LTV.

How IDFC FIRST Bank’s used car loan can help you?
 

IDFC FIRST Bank offers customised used car loans designed to support your vehicle purchase with unmatched flexibility:

• Loan up to 200% of the car’s value
• Instant sanction of up to ₹15 lakhs in just 15 minutes
• Eligibility based on your repayment track record and vehicle valuation
• No financial documents are required for loan amounts up to ₹30 lakhs
• Maximum loan amount of up to ₹50 lakhs
• Loan tenure of up to 5 years

Conclusion

The Loan-to-Value ratio plays a pivotal role in deciding how much you can borrow for a used car. By understanding and improving your LTV, you enhance your chances of loan approval and reduce your financial burden. With IDFC FIRST Bank’s pre-owned car loan offering up to 200% LTV and instant approval features, owning your desired vehicle becomes both affordable and stress-free.