If you’re thinking of buying a second-hand or classic/vintage car with a vehicle loan, you need to know how LVR will affect the overall cost of your loan.
Even if you plan on just rolling extras like insurance or on-road vehicle costs into the finance amount you apply for, spending five minutes to read this article could save you thousands of dollars.
Read on to learn about LVR and how it can increase the cost of your loan, and what you can do to reduce it and get a better deal.
LVR means Loan-to-Value Ratio and is the amount of money you borrow vs the value of the vehicle you are purchasing. The most basic calculation is:
The total value of the loan divided by the value of the vehicle purchased = LVR
Calculating LVR on a car loan will involve understanding the depreciation of the vehicle over time. As the vehicle loses value over time from being driven, there is less chance of a lender recouping their losses.
Lenders take LVR seriously and often use it to determine interest rates. As a rule of thumb, an LVR of 100% (i.e. loan equal to the value of the car) is good, and anything higher is not so good.
This is because of security on the loan, which means if the borrower defaults on their repayments, the security (i.e. vehicle) will not cover the cost of the outstanding loan when sold.
This is why short-term car loans will have higher repayments but usually a lower interest rate - there is less risk of depreciation and a lower overall LVR across the term of the loan.
If the vehicle you wish to purchase will result in a high LVR, you can make an upfront deposit to reduce it to an acceptable level. Otherwise, a personal loan may provide a better deal where the vehicle cannot be used as security to lower the rate to a competitive level.
If you’re buying a new vehicle, chances are your LVR will be low enough to get a decent deal. Consider comparing car loans to find the best offer.
If the vehicle you are buying is more than 10 years old (i.e already depreciated in value) or subject to heavy depreciation over time, chances are your LVR will be high.
You can reduce your LVR by making an upfront deposit. You can compare personal loans and car loans to see if you qualify for either and which may present a better overall deal.
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