Sarah T.
Refinancing your auto loan can do more than save you money. Yes, perhaps the biggest benefit is the ability to lower your interest rate, but there’s more to it than that. Sometimes, when we first make that auto purchase, we bite off a payment that we are not totally comfortable with. Auto refinancing can help stretch your loan out a bit further, lessening what you owe each month and making it easier to make ends meet. Plus, some auto loan refinancing lenders have more flexible terms and options than your initial loan might have offered.
That said, before you refinance a loan, it is important to understand the loan-to-value ratio and how that can impact your refinancing application. In this article, we’ll explain what you want to know to prevent surprises during the process.
What is Loan-to-Value Ratio, and Why Does it Matter for Auto Refinancing?
The loan-to-value (LTV) ratio is a big factor in auto refinancing. It measures the balance of your current loan compared to your car’s value, calculated using the formula: loan balance ÷ car value = LTV ratio. For example, if your car is worth $15,000 and you owe $12,000, your LTV ratio is 80%.
Lenders assess the LTV ratio to evaluate the risk of refinancing your loan. A low LTV ratio (e.g., 60%) indicates that the loan amount is well-supported by the car’s value, which may increase the likelihood of approval and could help secure a lower interest rate. In contrast, a high LTV ratio (e.g., 110%) suggests the loan exceeds the car’s worth, which might make approval harder or result in higher rates due to increased risk for the lender.
How to Calculate Your Loan-to-Value Ratio
So, how do you calculate the loan-to-value ratio of your vehicle? It all starts with estimating your car’s current market value. There are several tools and methods to help you determine this:
- Online car valuation tools: Websites like Kelley Blue Book, Edmunds, or NADA Guides can you an estimated automobile value based on the make, model, year, condition, and mileage.
- Local dealerships: Reach out to dealerships for a trade-in estimate, which can give you an idea of your car's worth.
- Comparable listings: Look for vehicles similar to yours being sold online or in your area for a ballpark value.
Once you know your car's market value, follow these steps to determine your loan balance:
- Log in to your online loan account or review your most recent statement to find the current payoff amount.
- Subtract any upcoming payments you plan to make before refinancing to get an accurate balance.
- Divide your loan balance by the estimated value of your car to calculate the LTV ratio.
Ways to Improve Your Loan-to-Value Ratio for Auto Loan Refinancing
Now that you understand how to calculate the loan-to-value ratio on your existing car and loan, let’s talk about how you can improve your ratio.
- Pay down the loan balance: Making extra payments toward your loan reduces the balance owed, helping to lower the LTV ratio and potentially improving your chances of refinancing.
- Increase the car’s value through repairs or upgrades: Addressing minor repairs, replacing worn parts, or adding features like new tires can make your car more appealing and increase its market value.
- Wait for market trends to improve car value: In some cases, holding onto your car during a seller’s market or when certain models are in higher demand can naturally raise its value.
- Understand what lenders typically look for: Many lenders prefer an LTV ratio below 100%, and ratios around 80% or lower are often more appealing. Showing that the car’s value significantly supports the loan may lead to better refinancing terms.
Interested in Auto Refinancing?
Is your loan-to-value ratio at 80% or under, and are you interested in auto refinancing? If so, RateWorks is here to help. We offer the same rates for all term options. This means full transparency before you sign on the dotted line.
Ready to see how much you can save on auto refinancing with RateWorks? Get a free quote today.
