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What Is Loan to Value Ratio and Why Does It Matter in Auto Refinance?
- Mar 25, 2025
- 13 min read
Last Updated: April 2026 (Updated to reflect current Canadian auto refinancing trends and lender requirements.)
Published: March 2025
Understanding your loan-to-value ratio (LTV) is one of the most important steps when evaluating your auto loan or exploring options to refinance a loan.
The LTV ratio measures how your loan amount compares to the car's value. It directly affects your loan application. It influences your chances of approval, the auto loan rates you get, and your flexibility when changing your loan. It also works alongside factors like your credit score to help lenders assess overall financial risk.
For many borrowers, LTV becomes especially important when:
Trying to lower their monthly payment and overall monthly costs
Exploring options to refinance a loan
Dealing with negative equity
Or understanding why a lender approved or declined their application
Your original down payment, current balance, and your vehicle's trade-in value can affect your LTV over time. Tools like Kelley Blue Book often estimate trade-in value. These factors shape your overall loan position.
A lower LTV typically means stronger equity and better loan terms, including lower interest costs, while a higher LTV can limit your options and increase the overall cost of borrowing.
In this guide, we’ll break down how loan-to-value ratio works, how it’s calculated, what lenders look for, and how it affects your approval and interest rate, especially in real-world scenarios that go beyond the basics.
In This Guide:
What Is Loan-to-Value Ratio (LTV) in Auto Financing?
Loan-to-value ratio (LTV) in auto financing is the percentage that compares your remaining loan amount to your vehicle’s current market value.
It’s calculated by dividing what you still owe on your auto loan by the value of the car today, not what you originally paid for it. Lenders often estimate this value using industry tools such as Kelley Blue Book or similar market guides to ensure consistency when reviewing your loan application.
This distinction matters because vehicles depreciate over time, often faster than your loan balance decreases in the early stages. As a result, your LTV ratio can change quickly, especially in the first few years of ownership, which can influence your approval odds and the auto loan rates you may qualify for if you decide to refinance.
Here’s how to think about it in practical terms:
If your loan balance is lower than your car’s value, you have positive equity and a lower LTV
If your loan balance is equal to the car’s value, your LTV ratio is 100%
If your loan balance is higher than your car’s value, you have negative equity, meaning your LTV ratio is above 100%
LTV is not just a number lenders calculate behind the scenes. It shows your financial position in your auto loan. It helps determine how much flexibility you have when you explore options like refinancing or changing your loan terms and interest costs.
How Do You Calculate Loan-to-Value Ratio on a Car Loan?
Calculating your loan-to-value ratio is straightforward once you know two numbers, your remaining loan balance and your vehicle’s current market value.
For example:
If you owe $18,000 on your car and it’s worth $22,000
→ Your LTV is about 82%
If you owe $18,000 and your car is worth $18,000
→ Your LTV is 100%
If you owe $18,000 but your car is worth $14,000
→ Your LTV is about 129%
While the calculation itself is simple, the vehicle value used can vary, which is where many borrowers get confused.
Lenders typically base your car’s value on:
Wholesale or trade-in value, not private sale price
Industry guides or valuation tools
Condition, mileage, and market demand
Because of this, your LTV may be higher than expected, especially if you’re estimating your car’s value on your own.
What Most People Don’t Realize
Your LTV isn’t static, it changes over time based on two key factors:
Your loan balance decreases as you make payments
Your vehicle value decreases due to depreciation
In the early stages of a loan, depreciation often outpaces your loan repayment, which can temporarily push your LTV higher before it improves.
What Is Considered a Good LTV Ratio for a Car Loan?
A “good” loan-to-value (LTV) ratio can vary depending on the lender, but in general, the lower your LTV, the stronger your position as a borrower.
Most lenders evaluate LTV within a range rather than a fixed number:
Below 80% is typically viewed as strong, often leading to better auto loan rates and higher approval confidence
80% to 100% is considered acceptable and commonly falls within standard approval guidelines
100% to 120% may still qualify, but often with stricter conditions or higher rates
Above 120% is generally seen as higher financial risk and may limit your financing or ability to refinance a loan
A lower LTV indicates that your vehicle is worth more than what you owe, which reduces the lender’s risk. This can translate into more favourable loan terms, including lower interest rates, reduced interest costs, and greater flexibility in your loan structure.
As LTV increases, the balance shifts. When your loan amount approaches or exceeds the value of the vehicle, lenders may adjust their offers by increasing rates, requiring a stronger credit score, or limiting available options.
It’s also important to recognize that LTV is only one part of the overall assessment. Lenders will look at your full financial profile, including your credit history, payment behaviour, income stability, and details about the vehicle itself. Because of this, two borrowers with the same LTV ratio may receive very different outcomes, including differences in approval odds.
While there isn’t a single “ideal” number, improving your LTV, even incrementally, can strengthen your position and expand the options available to you.
Why Do Lenders Care About Your Loan-to-Value Ratio?
Lenders use your loan-to-value ratio (LTV) as a core measure of risk when evaluating any car loan or refinance application.
Because your vehicle acts as collateral, the lender needs to understand how well the asset supports the loan. If payments stop, they may rely on the vehicle’s value to recover the remaining balance. Your LTV helps determine how likely that is.
When your LTV is lower, the vehicle is worth more than what you owe. This gives the lender a stronger margin of protection and typically results in more favourable terms.
As LTV increases, that margin becomes smaller. When the loan balance approaches or exceeds the vehicle’s value, the risk of loss grows, which can lead lenders to be more cautious in how they structure the loan.
This is why LTV plays a direct role in key lending decisions, including:
Whether your application is approved
How much financing is offered
The interest rate applied to the loan
Any additional conditions attached to the approval
Even when other parts of your application are strong, your LTV can still influence the final outcome. Borrowers with similar credit profiles can receive different offers based on how their loan balance compares to the value of the vehicle.
Understanding this relationship can help explain why loan terms vary and what factors may be limiting or improving your options.
How Does LTV Affect Your Interest Rate and Approval Chances?
Your loan-to-value ratio (LTV) has a direct impact on both the interest rate you’re offered and your likelihood of approval.
Lenders assess LTV alongside factors like credit history, income, and overall financial stability to determine how much risk is involved in the loan. As that risk increases, it typically affects both the cost of borrowing and the availability of financing options.
When your LTV is lower, your loan is backed by a stronger asset position. This often results in more competitive interest rates and a higher probability of approval. Borrowers in this range are generally seen as lower risk, which encourages lenders to offer more favourable terms.
As LTV rises, the dynamic changes. A higher ratio means the loan is more closely aligned with, or exceeds, the value of the vehicle. In these cases, lenders may respond by adjusting the structure of the loan to account for the increased risk.
This can include:
Higher interest rates to offset potential loss
More selective approval criteria
Fewer available lending options
When LTV is much higher than 100%, approval can be harder. This is especially true unless other parts of your application are very strong.
It’s also worth noting that LTV can influence outcomes even when everything else appears similar. Two borrowers with comparable credit profiles may receive different offers simply because their loan balances and vehicle values differ.
Understanding how LTV affects approval and pricing can help you understand your options. It can also help you find ways to improve your position before applying or refinancing.
What Happens If Your LTV Is Over 100%?
When your loan-to-value ratio (LTV) exceeds 100%, it means your loan balance is higher than the current value of your vehicle. This is commonly referred to as negative equity.
This situation is more common than many borrowers expect, particularly in the early years of a loan. Vehicle depreciation, longer loan terms, and the inclusion of additional costs such as taxes, fees, or extended warranties can all contribute to an LTV that rises above 100%.
Being in a negative equity position doesn’t prevent you from moving forward, but it does change how lenders evaluate your options. Because the vehicle no longer fully supports the loan, there is a higher level of risk involved.
As a result, you may experience:
Fewer refinancing options available
Higher interest rates if you do qualify
Challenges when selling or trading in your vehicle
A remaining balance after the vehicle is sold
While these limitations can feel restrictive, they are not permanent. As your loan balance decreases and your vehicle’s value stabilizes, your LTV can gradually improve.
In the meantime, some borrowers are still able to refinance or adjust their loan structure, particularly if other parts of their financial profile are strong. Others may choose to wait or take steps to reduce their balance before exploring new options.
Understanding your position is key. Once you know where your LTV stands, you can make more informed decisions about whether to act now or plan for a better opportunity ahead.
Can You Refinance a Car Loan With a High LTV?
Refinancing a car loan with a high loan-to-value ratio (LTV) is possible, but it depends on both the level of your LTV and the strength of your overall financial profile.
Most lenders have guidelines around the maximum LTV they are willing to accept, often falling within a general range. When your LTV is on the higher end, the focus shifts beyond the vehicle itself to the broader context of your application.
Lenders will typically look more closely at factors such as your credit history, payment behaviour, income stability, and overall debt profile. A strong performance in these areas can sometimes offset a higher LTV and improve your chances of approval.
There are situations where refinancing is more likely to be considered, particularly if:
You have a consistent history of on-time payments
Your credit profile has improved since taking out the original loan
Market conditions or interest rates have shifted
The loan can be restructured in a way that reduces overall risk
At the same time, there are scenarios where refinancing may be more limited. If your LTV is much higher than usual or your financial profile has weakened, lenders may be more cautious. They might require changes before approving a new loan.
In these cases, improving your position first, either by reducing your balance or strengthening other aspects of your application, can make a meaningful difference.
Ultimately, a high LTV does not automatically prevent refinancing, but it does narrow the range of available options. Understanding where you stand allows you to approach the process with clearer expectations and a more strategic plan.
How Does LTV Change Over Time as You Pay Your Loan?
Your loan-to-value ratio (LTV) is not static, it changes over time as both your loan balance and your vehicle’s value evolve.
With each payment you make, your loan balance gradually decreases. At the same time, your vehicle continues to depreciate, particularly in the early stages of ownership. These two factors move at different speeds, which is why LTV doesn’t always improve right away.
Why LTV Can Stay High Early in Your Loan
In the first few years of a loan, depreciation often outpaces the reduction in your balance. This can keep your LTV elevated or even push it higher, especially if the vehicle loses value quickly.
This is a common reason borrowers find themselves in a higher LTV position early on, even when payments are being made consistently.
When Your LTV Starts to Improve
As your loan progresses, more of each payment goes toward reducing the principal rather than interest. At the same time, depreciation begins to slow.
This shift helps your LTV stabilize and gradually improve, putting you in a stronger position over time.
When Timing Can Work in Your Favour
Because LTV evolves, timing can play an important role when considering your options. You may find more flexibility when:
Your remaining balance drops below the value of the vehicle
Your LTV moves closer to or below 100%
Other parts of your financial profile have improved
In some situations, waiting can make a meaningful difference. Even a relatively short period of time can improve your LTV enough to expand your available options.
Understanding how your LTV changes over time allows you to make more informed decisions and choose the right moment to act.
How Can You Improve Your Loan-to-Value Ratio?
Improving your loan-to-value ratio (LTV) comes down to strengthening the gap between what you owe and what your vehicle is worth. While you can’t control every factor, there are several practical steps that can help improve your position over time.
Pay Down Your Loan Balance Faster
One of the most direct ways to improve your LTV is to reduce your loan amount. Making additional payments toward the principal, even in small amounts, can help lower your balance more quickly and move you closer to positive equity.
Avoid Carrying Over Additional Debt
When refinancing or purchasing another vehicle, rolling remaining debt into a new loan can increase your LTV. Keeping your loan aligned with the actual value of the car helps maintain a healthier ratio and reduces long-term risk.
Consider Loan Structure and Term Length
Longer loan terms can slow down how quickly your balance decreases, especially in the early stages. Shorter terms, where manageable, tend to reduce the likelihood of falling into a high LTV position.
Maintain Your Vehicle’s Value
Your LTV is influenced not only by your loan balance but also by the value of the car. Keeping your vehicle in good condition, managing mileage, and maintaining regular servicing can help preserve its value over time.
Be Strategic About Timing
If your LTV is currently high, waiting until your balance decreases or your overall financial profile improves may increase your chances of qualifying for better refinancing options. Even small changes in your position can expand what’s available to you.
Improving your LTV is often a gradual process, but consistent steps can make a meaningful difference. As your position strengthens, you may gain access to better loan terms, lower interest rates, and more flexibility when exploring your options.
LTV vs Equity, What’s the Difference and Why It Matters?
Loan-to-value ratio (LTV) and equity are closely connected, but they describe your loan from two different perspectives.
LTV looks at your loan from the lender’s point of view. It measures how your remaining balance compares to the value of the vehicle, expressed as a percentage. Equity, on the other hand, reflects your position as the borrower, it represents how much of the vehicle you actually own.
These two concepts move together:
A lower LTV means you have more equity in your vehicle
A higher LTV means you have less equity
An LTV above 100% means you have negative equity
For example, if your vehicle is worth $20,000 and your loan balance is $15,000, you have $5,000 in positive equity. If the balance and value are equal, you have no equity. If the balance exceeds the value, you are in a negative equity position.
Understanding the difference between LTV and equity can make it easier to evaluate your options. Equity helps you understand your financial position, while LTV is what lenders use to assess risk when reviewing your application.
The goal over time is to build equity, which naturally lowers your LTV and improves your flexibility when it comes to refinancing, selling, or adjusting your loan.
Final Thoughts, When Should You Pay Attention to Your LTV?
Your loan-to-value ratio (LTV) isn’t something you need to think about all the time, but it becomes important at the moments when you’re making decisions about your loan.
If you want to refinance a loan, compare offers, or think about selling or trading in your vehicle, your LTV explains what options you have. It also explains why some terms look the way they do.
It’s especially worth paying attention to when you’re:
Trying to lower your interest rate or monthly payment and overall monthly costs
Exploring refinancing options
Considering selling or trading in your vehicle
Wondering why your approval or loan terms have changed
LTV shows where you stand. It compares your loan balance to the car's value. Lenders use it to evaluate your profile along with your debt-to-income ratio and credit history.
As your loan changes over time, your LTV will too. Even small improvements can make a difference in the options available to you and how lenders view your next loan application.
If you’re thinking about your next move, understanding your LTV can give you the clarity you need to make more confident, informed decisions.
Frequently Asked Questions About Loan-to-Value Ratio (LTV)
What is a loan to value ratio (LTV)?
LTV is a percentage that compares a loan amount to the value of the asset being financed. It’s calculated by dividing the loan amount by the appraised value of the asset, then multiplying by 100.
What is a good loan-to-value ratio for refinancing a car loan?
A good loan-to-value ratio for refinancing is typically below 100%, meaning your vehicle is worth more than what you owe. Lower LTV ratios often lead to better interest rates and more lender options. Higher LTV ratios may still qualify depending on your credit, income, and financial profile.
Can you refinance a car loan with negative equity?
Yes, refinancing with negative equity is possible in some cases. Lenders may still approve applications with higher LTV ratios, especially if you have strong credit, stable income, and a solid payment history. However, options may be more limited and interest rates may be higher due to increased risk.
How do I calculate my LTV?
Use this formula:
LTV = (Loan Amount ÷ Asset Value) × 100
Example: If you’re borrowing $15,000 for a car worth $20,000, your LTV is 75%.
Does loan-to-value ratio affect your interest rate?
Yes, your LTV has a direct impact on your interest rate. Lower LTV ratios typically lead to lower rates because they represent less risk to the lender, while higher LTV ratios often result in higher rates or stricter loan terms. LTV is one of the key factors lenders use when assessing risk.
How do lenders determine your car’s value for LTV?
Lenders usually find your vehicle's value using pricing guides, wholesale or trade-in values. They also consider mileage, condition, and market demand. This means the value used for LTV calculations may be lower than what you expect from a private sale.
When is the best time to refinance a car loan based on LTV?
The best time to refinance is when your loan balance has decreased and your LTV has improved, ideally closer to or below 100%. Refinancing may also make sense if your credit score has improved or interest rates have changed, allowing you to secure better terms.
Can improving your LTV lower your monthly car payment?
Yes, improving your LTV can help you qualify for better refinancing options, which may include lower interest rates or more flexible loan terms. These improvements can reduce your monthly payment and overall cost of borrowing over time.
Important Note: This article and its resources are purely for informational use. They do not reflect the offerings of specific companies or lenders. Our goal is to provide knowledge and insights for better financial decision-making. We recommend conducting in-depth research and seeking professional advice before making any financial decisions. SafeLend Canada, while not a lender, collaborates with various lenders to assist clients in refinancing their auto loans.
