Lenders use the Loan-To-Value (LTV) ratio to determine the amount of financing they can provide for an auto loan. To calculate the LTV ratio, divide the vehicle’s estimated value by the loan amount. Vehicle value is based on market analysis and similar vehicles recently sold in the same area. An accurate loan-to-value analysis is essential to determining a vehicle loan. It can help lenders determine the risk they take when issuing a loan.
Acceptable LTV Ratio
By properly assessing the value of a used vehicle, lenders and borrowers alike can benefit from an accurate LTV ratio. For lenders, having an accurate assessment of the vehicle’s value can reduce their risk when issuing a loan. This allows lenders to extend more favorable terms, such as lower interest rates and longer repayment periods, which benefit borrowers.
The acceptable LTV ratio for an auto loan varies depending on the lender and the specific circumstances of the loan. In general, lenders prefer to see a lower LTV ratio. A lower LTV ratio indicates the loan amount is less than the value of the vehicle being purchased. A lower LTV ratio reduces the lender’s risk if the borrower defaults.
Inaccuracies In The LTV Ratio
Inaccuracies in the LTV ratio can lead to potential losses for credit unions. Lenders may lend too much money and take on more risk than anticipated.
When re-marketing a vehicle, an inaccurate LTV ratio can lead to significant losses for credit unions. The lender may lose money on the sale of the car if they inaccurately calculate the original loan-to-value (LTV) ratio. Lenders must conduct an accurate LTV analysis before approving vehicle loans.
Factors To Consider In Calculating The LTV Ratio
When assessing a used vehicle for its LTV ratio, it is essential to consider factors such as age, condition, mileage, and other factors that might affect the vehicle’s value. Additionally, it is necessary to take into account market conditions and similar vehicles which have recently been sold in the same area.
Various events throughout its life can significantly impact the value of a used vehicle. Accidents, floods, and fire damage can considerably affect the car’s market value and should be considered when assessing its loan-to-value ratio.
Significant Effect Of Branded Titles On Loan-To-Value Ratio
A branded title is a generic term that can describe any vehicle that has experienced a significant event. Branded titles can have a substantial effect on the market value of a car. A branded title can reduce the value of a vehicle by as much as 50 percent. As a result, lenders may be less likely to offer financing due to the increased risk associated with such cars. Furthermore, most mechanical breakdown protection providers will decline to protect vehicles with a branded title. Below, we explore several types of branded titles.
Flood Damage
Flood damage is a significant problem that can result in a branded title and drastically reduce a used vehicle’s value. Contaminants and debris in floodwaters can corrode metal parts, saturate electrical systems, and cause many other issues. The severity of these issues depends on the extent of the flooding. Still, in any case, it can be extremely costly to repair and represent an increased risk associated with these vehicles.
Fire Damage
Fire damage can be especially devastating to a vehicle. In most cases, a fire destroys a car and makes it unrepairable. The heat from the fire can melt plastic parts, warp metal components, and damage electrical systems. Fire can also spread quickly and cause extensive smoke damage to the vehicle’s interior. As a result, any car involved in a fire may be impossible to re-market and can represent a significant loss for lenders.
Accidents
When assessing LTV, one should take into account accidents. Damage from an accident can range from minor to total loss. Depending on the accident’s severity, one may need to repair or replace the vehicle. Even minor damage can reduce the value of a used car and should be considered when assessing its LTV ratio.
Total Loss
Total loss declarations occur when a vehicle is deemed beyond repair due to its cost exceeding its market value. This cost can often be higher than the vehicle’s value after repairs. Money spent on repairs would not be recovered. When a total loss declaration is made, the insurance company may sell it for salvage.
Salvage Title
Many vehicles are repaired after being declared a total loss and returned to the market with a rebuilt or salvage title. A lender may approve a loan for salvage or rebuilt title after determining an accurate LTV for the vehicle. However, most vehicle protection plan providers will not offer coverage for a car with a branded title. If you find yourself in this situation, autopom! has options for vehicles with a salvage title. To find suitable options for different circumstances, contact Mike Jones at autopom! (949) 309-2526.
Mileage Rollback
Mileage rollback or odometer rollback is another event that can affect LTV. It manipulates the odometer reading on a vehicle to make it appear to have fewer miles than it does. This practice is illegal in most states and is generally done to increase the perceived value of the vehicle. Lenders may not detect an odometer rollback, which can cause a significant miscalculation in the LTV ratio.
CarFax Reports Are An Essential Tool In Helping to Determine LTV Ratio
CarFax reports are essential for loan-to-value analysis, providing detailed information on a vehicle’s history. Reviewing reports lets lenders gain insight into a used car’s condition and history before issuing a loan. CarFax reports can help to identify significant events such as the ones described above that can affect the vehicle’s value. Additionally, CarFax reports provide information on the car’s recent maintenance, service, or repair work. This information can then be used to properly assess the loan-to-value ratio and give lenders and credit unions an accurate estimate of the car’s market value.
By Mike Jones, President & CEO of autopom! Insurance Services, LLC
