LVR stands for loan-to-value ratio
Lenders use it when assessing risk
Your LVR can affect the cost of your car loan
In our car loan LVR guide:
If you’re thinking of buying a vehicle with a car loan, knowing what your LVR is important.
Particularly if you plan on rolling extras into the finance amount you apply for.
Read on to learn about LVR and what you can do to reduce it and get a better deal.
LVR means loan-to-value ratio. It’s the amount of money you borrow relative to the value of the vehicle you are purchasing.
The calculation is:
The total value of the loan
divided by the value of the vehicle being purchased = LVR.
It's usually expressed as a percentage. To get that, you multiply the number by 100.
For example, if I need a $40,000 loan to buy a car valued at $50,000, my LVR is:
40,000 / 50,000 = 0.8 x 100 = 80%
Lenders sometimes use the LVR to determine car loan interest rates for borrowers.
As a rule of thumb,
the lower your LVR, the better it is for the lender.
An LVR of up to 100% (i.e. the loan is less than or equal to the value of the car) is generally okay.
Anything higher is not so good.
This is because the car is used as security on the loan.
If the borrower defaults on their repayment, selling the car will not recoup all of the lender’s costs.
Because the loan amount is higher than the car’s value (e.g. the loan was also used to cover some related costs, like insurance, delivery costs).
This is a risk for the lender.
It’s why an LVR of over 100% could mean a
higher interest rate.
Try our car loan calculator to see how your interest rate can impact your regular repayments and total loan costs.
Reducing the risk for the lender can
improve your chance of being approved (in addition to factors like having a good credit rating).
Buying a popular model of car that will maintain its value (i.e. not depreciate quickly) can also help to keep your LVR low.
Otherwise, if your LVR is a concern, an unsecured personal loan may be more suitable as it won’t be secured by the vehicle.
Expect to pay more interest on an unsecured loan.
yes it can.
If your vehicle has depreciated in value at a faster than you have been paying down your loan, your LVR will increase.
If you apply to refinance your car loan, the new lender may see this high LVR as a risk.
This could mean you WON'T be eligible for the lowest car loan rates.
It’s why having a low LVR to start off with is important.
And why paying down your car loan
as fast as possible can be a smart approach.
If your car loan has a balloon payment, your LVR will generally remain higher during the loan term.
Car Loans guides and resources
Where to next? Read our other car loan guides to understand more about your options for financing your next car.