Loan to Value Ratio 101
Before you take out a car loan, you might want to understand some of the terminologies that the lenders use. 'LVR' is one of the factors that determine whether your secured car loan will be approved, so it's important that you understand what it means.
What is an LVR: Explained
Your loan to value ratio is exactly what it sounds like: the size of your loan compared to the value of the property the loan is secured by.
LVR = Amount Borrowed (i.e. Loan Amount)/Value Of Car
As time passes, your LVR may change as you pay down the loan amount. The value of your car will also depreciate over time, affecting your LVR.
Why Is LVR Important?
When you take out a car loan, the car you purchase will form the security for the loan. If for any reason you can't pay back your car loan in full, the lender may sell the car to recover the amount owing on the loan.
To ensure that this right to sell the car is legally enforceable, the lender will register an interest over the car on the PPSR until the car loan is paid.
To ensure that they will actually be able to recover the money lent to you, lenders have a fixed limit on the LVR that they will allow you to borrow.
What Is The Maximum LVR?
Some lenders will let you borrow up to 80% of the value of the vehicle, while others may extend this as high as 150%, allowing you to pay for insurance and on-road costs with your car loan funds.
To be approved for a high LVR car loan, you will usually need to have a good credit rating.
Can I Reduce My LVR?
To reduce the LVR on your car loan, you need to choose a car that is valued in line with the market rates. This might mean choosing a car without modifications.
You can also lower your LVR by providing a deposit towards your car loan, and make sure that you have enough cash for the insurance, stamp duty, and other initial costs of buying a car.
How Does LVR Work?
The best way to explain how LVR works in practice is to look at a real-life example.
Case Study: Sarah's Low LVR Car Loan
Sarah is looking to buy a car but doesn't want to buy a brand new car. She wants a loan term of three years. This means she'll be able to get a secured car loan on any car that's up to 7 years old to minimise the loan amount she'll need.
To keep her loan term short, Sarah puts a $1500 deposit towards the purchase. This means that she can purchase the perfect 2012 VW Golf that she has found for $15,990 with a loan amount of $14,490.
Sarah's LVR at the time of purchase is 90.6%.
Providing a deposit towards your car loan will mean that you have a lower LVR, and increase your likelihood of approval for a car loan.
What Is The Ideal LVR?
The ideal LVR for your car loan will vary depending on your current financial position. While you may have enough money in the bank for a large deposit, you may still choose to take out a high LVR car loan so that you can use the money you have put aside for other purposes.
If you have a good credit rating, you're more likely to be approved for a high LVR car loan. If your credit rating isn't the best, you will probably need to have a deposit and apply for a low LVR car loan.
What's The Next Step
Now that you know how your LVR works for a car loan, you're one step closer to making a fully informed decision about the best car loan option for you.
Whether you need a high or low LVR, there's a range of different car loans and lenders that you can choose between. If you want some more information about lender requirements and how a car loan will work, you can talk to one of our friendly staff.