The Loan to Value (LTV) in case of a car loan is simply the amount of money that can be sanctioned as a loan to the value of the car that is being purchased. There are different norms which are practiced by different banks and financing agencies while fixing the LTV in car loans. There are a few anomalies in this aspect which the prospective car loan customer must understand and appreciate while taking the credit to own a new car. The LTV for used cars in India is much lower as compared to new cars as banks prefer financing new cars.
While fixing the LTV of a new car is a relatively easier process the same is quite complex in case of a used car as the rate cannot be ascertained comprehensively and accurately. Thus in case of the used cars the LTV is determined by taking into consideration the trade of wholesale value is typically used in order to determine the value of a vehicle so as to not overstate the expected sale or trade-in value. It is the basic reason why the financiers always have a lower LTV for used cars so as to remain on the safe side and not over finance a old car.
Implications of LTV %
In case of a car loan the LTV is calculated by the simple formula:
Loan to Value (LTV) =Amount Financed/Vehicle Value
When the LTV is 1 it means the entire value of the car (100%) has been provided through the car loan. This indirectly implies that the customer has not made any down payment before availing the loan. The lower the figure of the LTV the more is the contribution of the borrower towards purchase of the car. In no case should the LTV have a value of more than 1 as it implies that the borrower has tricked the financier into lending him more than the cost of the car.
LTV on Car Loans in India
As a general rule the LTV on new cars in India is about 80% with a maximum limit of 90% and for the used cars it is around 60-79%. However the LTV varies with the segment of car being purchase as well as the credit rating and repayment capacity of the borrower. In case of salaried people especially those in public sector organizations or reputed and well established private sector firms there may be cases of banks providing 100% finance including the on road costs that may be accrued. The banks have the discretionary powers to increase or decrease the LTV on a car loan depending on their assessment of the borrower’s financial profile. There guideline regarding LTV for home loans in India by the RBI but the same has not been stipulated for the car loans leading to wide variation in LTV on car loans.
It is for the customer to decide the amount that he wants to avail as the car a loan against the kind of down payment that he is able to make. However as far as possible having a lower LTV in a car loan is in the better interest of the borrower as the general rates of car loans in India are higher and the assets as such is depreciating in nature. Therefore it is advisable to use available funds to make bigger down payment.
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