When applying for a collateralized loan such as a car loan or mortgage, you may hear the term “LTV” thrown around along with a bunch of other acronyms. But what is LTV?
LTV stands for “Loan-to-Value” and is a ratio expressed as a percentage. It is calculated by dividing the amount you’re borrowing by the value of the collateral being financed. For example, if you’re financing a car for $25,000 but the NADA value is $21,000, your LTV would be 119%.
25,000 divided by 21,000 = 1.19, or 119%
The lower your LTV, the better equity position you, the borrower, are in. In order to not be upside down on your loan, the goal is to owe as little as possible as compared to the value of the collateral. If you’re financing more than 100% LTV on a vehicle, consider purchasing GAP Insurance to protect yourself in the event your car is totaled. If your vehicle is declared a total loss and your LTV is more than 100%, you may owe money out of pocket since your insurance company will only pay out up to 100% of the value.
When considering Auto Loan Financing, Amplify uses the NADA “Clean Trade” value to determine the LTV. Other lenders may use Kelley Blue Book, Edmunds, or other NADA values. Every lender is different, so consider that factor when doing your research.
When financing a Mortgage, lenders will usually consider an appraised value when processing the loan. Depending on the amount you’re borrowing, a lender may require multiple appraisals from different appraisers to determine the value; others may simply use the county’s tax appraisal value. Again, every lender and loan situation is different, so ask your lender what their process is.