Car Finance: Loan to Value Ratio (LVR) Explained
When looking for a loan or finance for any asset, you will come across a host of different terms and concepts. One that you will often come across is the loan to value ratio or LVR. This can come in very important when you first start the car finance process, so it is essential that you understand its purpose right away.
What is LVR?
Put simply, your Loan to Value Ratio (LVR) is the amount of money you will need to borrow to be able to purchase a specific car, against the value of that specific car. You can work this out by taking the total value of the loan you wish to borrow and dividing it by the value of the car you’d like to purchase. By calculating this figure, you will be given a percentage that lenders will work with as an LVR.
For example, if you choose to take out a car loan for $33,000, and the vehicle you wish to purchase is worth $30,000 (with the additional $3,000 being for delivery, on roads, etc), your LVR will roughly calculate to 110%. Some guides note that you will likely receive better terms on your loan if your LVR is less than 100%. However, that isn't always the case in practice. The amount you receive and the terms you are bound to will likely differ from lender to lender!
Why is LVR Important?
LVR may not seem particularly relevant to a borrower. However, it is extremely important to lenders. The general rule of thumb is that a lender will see a loan as more of a risk if the LVR is higher. That is because less money is being offered up by the borrower as a down payment. For the borrower, a higher LVR generally means a higher interest rates. To avoid higher rates and to boost your LVR, you should pay more upfront as your initial deposit.
What Should I Do?
The concept of LVR doesn't have to be complicated. Essentially, the best things a borrower can do is save up for a deposit and make as big a payment as possible on their car. Doing so will mean you have less to pay every month and you will likely receive more favourable interest rates. Saving up a deposit for a vehicle isn't always easy; however, it is certainly recommended.
Your LVR will not hold you back from borrowing money to buy a car. You should bear it in mind with your credit file but also bear in mind that different lenders work in different ways. Be ready and willing to make a down payment!
Are you considering purchasing your first car on finance? Still unsure about all that financial jargon? Call Auto Car Loans today on 1300 301 051 for some friendly impartial advice.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.