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.
What is LVR on a car loan?
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%
How does LVR affect car loan rates and total costs?
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 car insurance, registration and CTP plus 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.
How do you reduce the LVR on your car loan?
If the vehicle you currently have your eye on will result in a high LVR, you can always consider a cheaper car.
Or you can contribute a deposit to bring the LVR down.
This can be a good approach for people applying for riskier loans, like bad credit car loans or low doc car loans.
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.
Can your car loan LVR affect your ability to refinance?
In short, 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.
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