What is the Loan-to-Value Ratio in Pre-Owned Car Loans? A Complete Guide

A majority of banks and NBFCs (Non-banking Financial Organisations) provide pre-owned car loans, making the process of financing a second hand car simpler. However, before getting approved for a Pre-owned Car Loan, you might come across the term “loan-to-value ratio (LTV)”. The loan-to-value ratio is the percentage of the value of the car for which a lender will give you a loan.

In this blog, we will discuss everything you need to know about the LTV ratio and why it is important for a used car loan. Read on to learn how the LTV ratio influences the amount of the loan, interest rate, and your ultimate buying decision.

Loan-to-Value Ratio in a Pre-owned Car Loan

The LTV ratio tells you about the maximum loan amount you can get, depending on the value of the used car. The rest of the amount is to be paid by the buyer as a down payment. For instance, if the used car’s value is ₹10 Lakh and the bank is willing to lend ₹8 Lakh, the LTV ratio is 80%.

The higher the LTV ratio, the higher the loan amount you can get from the lender to buy a used car. However, if your LTV ratio is low, then you’ll need to make a higher down payment to buy a used car.

When you apply for a second hand car loan, the lenders consider factors such as your credit score, annual income, financial records, and the car’s value. If you have verifiable income proof and a strong credit history, you can be provided with a higher LTV ratio. This can help you save money on a down payment.

However, in a used car loan, the LTV ratio is generally lower than new cars. The lender calculates the value of the pre-owned car based on age, condition, mileage, and resale value.

Factors Determining the Loan-to-Value Ratio in a Car Loan

Here are the key factors that determine the LTV ratio you may qualify for in a car loan:

• Age and Condition of Car: Old cars will give you a lower LTV ratio, as they are riskier for lenders.

• Credit Score: A good credit score indicates lower risks and can help you get the maximum loan amount.

• Annual Income: Salaried professionals, as well as self-employed individuals with steady income, have more chances of getting a higher LTV ratio. This is because the income stability of borrowers provides loan repayment assurance to lenders.

• Bank Policies: Policies regarding the LTV ratio for used cars can differ from various banks and financial institutions.

• Car Model: Some car models (new models) retain value better, which can influence the lender’s assessment of the car’s current value and affect the LTV.

How Does LTV Ratio Impact Your Pre-owned Car Loan Value and EMI?

Whenever you receive a higher LTV, the bank finances a higher portion of the value of the car, and you have to pay less for a down payment. However, this also results in higher monthly EMIs, as the loan principal is larger.

A lower LTV will require you to pay more up front when buying the car. However, your car loan EMI will be lower, and your loan maturity will come much earlier. You can try to find the right balance with a car loan EMI calculator before applying.

Example of Loan-to-Value Ratio

Suppose:

• Used car value: ₹6 Lakh

• Bank’s LTV: 75%

• Amount that you will get as a loan: ₹4.5 Lakh

• Down payment: ₹1.5 Lakh

If your rate of interest is 12% on a 5-year loan, you can calculate your monthly payments with the help of a car loan EMI calculator.

Benefits of Knowing the LTV Ratio Before Taking a Pre-owned Car Loan

Knowing your LTV ratio before applying for second-hand car finance has several benefits:

• You understand the maximum loan amount you are eligible for.

• You can better plan your repayment tenure.

• You can prepare for a higher down payment if required.

• You know what to expect during the loan approval process.

How to Improve Your LTV Ratio for a Pre-owned Car Loan?

To get the best LTV ratio on your car loan for used cars, keep the following tips in mind:

• Apply with a good credit record and avoid Personal Loan defaults, home loan defaults, and car loan defaults.

• Demonstrate a stable monthly income through bank statements and financial statements.

• Select a fairly newer used car that’s in good condition.

• Include a co-applicant with a stable income, as it helps improve your loan terms and LTV ratio.

Pre-Owned Car Loan Application Process

The general application process for a Pre-owned Car Loan is very simple and easy. Just follow these steps:

1. Select a lender that offers the convenience of applying online.

2. Provide your personal details, phone number, and business purpose (if the car is for business).

3. Provide income documents, bank statements, and other financial documents.

4. The lender will do a credit check and check the value of the second-hand car.

5. If all requirements are met, your loan will be approved quickly.

To Conclude

The loan-to-value ratio is one of the most important aspects that you should consider when obtaining a Pre-owned Car Loan. It determines your loan amount, monthly EMI, and the down payment you’ll have to make.

However, before you apply for a used-car loan, know the value of your old vehicle. Also, maintain a good credit score, and choose a suitable lender to get the highest loan possible at affordable interest rates. 

Whether you are salaried or self-employed, understanding the LTV ratio can make buying your dream car easier. Obtain a Pre-owned Car Loan from Poonawalla Fincorp with a high LTV and instant approval. Explore more on the official website.

FAQs

Do luxury pre-owned cars get a higher or lower loan-to-value ratio?

Luxury cars often have a lower LTV ratio as lenders consider them riskier and more expensive to insure or repair, even if their resale value is strong.

Can my credit score alone increase the Pre-owned Car Loan LTV ratio?

A good credit score improves your chances; however, the LTV also depends on the car’s condition and the lender’s policy.

Is the loan-to-value ratio fixed for all financial institutions?

No, each lender has different policies and may offer different LTV ratios.

Can a co-applicant improve my loan-to-value ratio for a Pre-owned Car Loan?

Yes, adding a co-applicant with strong income and credit history can increase approval chances and loan amount.

How does the LTV ratio for a pre-owned car affect the interest rate?

A higher LTV ratio often means a larger loan relative to the car’s value. This can lead lenders to charge a slightly higher interest rate to account for increased risk.