What Is LTV and Why Does It Kill Car Deals?

What Is LTV?

Loan-to-value ratio (LTV) is the relationship between the amount being financed and the value of the vehicle being purchased. It's expressed as a percentage: if a customer is financing $20,000 on a vehicle worth $20,000, the LTV is 100%. If they're financing $22,000 on a vehicle worth $20,000, the LTV is 110%.

Lenders use LTV as a measure of risk. The higher the LTV, the more the lender is exposed if the customer defaults and the vehicle needs to be repossessed and sold. In special finance, where default risk is already higher, LTV is a critical factor in whether a deal gets approved.

Why High LTV Kills Deals

Every lender has maximum LTV thresholds that vary by credit profile, vehicle type, and program. When a deal exceeds those thresholds, it gets declined, regardless of how strong the customer's income is or how well the rest of the deal is structured.

High LTV is often the result of one or more of the following: the vehicle is overpriced relative to its book value, the customer has insufficient down payment, the deal includes too much negative equity from a trade-in, or the advance includes too many add-ons and fees.

How to Manage LTV in Special Finance

Managing LTV in special finance requires understanding what each lender's program allows for the specific credit profile and vehicle, and structuring the deal accordingly. This may mean selecting a different vehicle, requiring a larger down payment, adjusting the advance, or finding a lender with a higher LTV tolerance for that type of credit.

The key is understanding LTV as a deal variable that can be managed, not just a number that comes back from the lender as a decline reason.