What is Loan-to-Value (LTV) and why it matters to understand.
Published September 25, 2025 | 
3.5 minute read
When applying for a loan, especially a mortgage or auto loan, you’ll often hear the term loan-to-value (LTV). Understanding LTV is crucial because it affects your eligibility, interest rates, and overall borrowing costs. In this article, we’ll break down what LTV is, how it’s calculated, and why it matters for borrowers.
What is Loan-to-Value (LTV)?
Loan-to-value (LTV) is a financial metric that compares the amount of a loan to the value of the asset being purchased. Essentially, it shows the ratio of how much you’re borrowing versus how much the property or vehicle is worth.
LTV ratio = (loan amount⁄current vehicle value) x 100
Example calculation
Suppose you have a loan amount of $20,000 and the current value of the vehicle is $25,000. The LTV ratio would be:
LTV ratio = (20,000⁄25,000) x 100 = 80%
In this case, the LTV is 80%, meaning you’re borrowing 80% of the vehicle's value.
Why LTV matters
1. Determines Loan Approval
Lenders use LTV to evaluate risk. A lower LTV indicates that the borrower has more equity in the property and is considered less risky. Higher LTV loans may be harder to approve.
2. Affects Interest Rates
Borrowers with lower LTV ratios often qualify for lower interest rates, while higher LTVs may come with higher rates due to increased risk to the lender.
3. Insurance Requirements
- For auto loans, high LTV ratios may influence gap insurance recommendations.
- For mortgages, an LTV above 80% often requires private mortgage insurance (PMI).
4. Equity & Refinancing
LTV also impacts your ability to refinance or tap into equity. A lower LTV gives you more flexibility and potentially better terms.
Types of LTV
- Primary LTV – Standard calculation of loan amount divided by the appraised value.
- Combined LTV (CLTV) – Includes additional loans secured by the same property (like a second mortgage).
Tips for managing LTV
- Make a larger down payment to reduce your LTV.
- Improve property or asset value before applying for a loan.
- Shop around for lenders; some offer better terms for higher LTV ratios.
- Monitor LTV during ownership to plan for refinancing opportunities.
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Final thoughts
Loan-to-value (LTV) is a key factor in borrowing decisions. Understanding your LTV helps you:
- Know how much you need to borrow
- Predict interest rates and insurance requirements
- Make informed decisions about refinancing or purchasing
Lower LTVs generally mean better loan terms, less risk, and more financial flexibility. Whether you’re buying a home, vehicle, or other asset, keeping LTV in mind is a smart step toward financial planning.
Final thoughts
What is a good LTV ratio?
Most lenders consider 80% or lower as ideal, though some programs allow up to 97% LTV with special requirements.
Can LTV change over time?
Yes. As you pay down your loan or if the asset’s value increases, your LTV decreases.
How does LTV affect mortgage insurance?
Mortgages with LTV above 80% usually require private mortgage insurance (PMI) to protect the lender.