What Is LVR on a Car Loan? Simple Guide

When you apply for a car loan, you may hear a lender or broker use the letters LVR.

LVR stands for loan-to-value ratio. It sounds complicated, but the idea is simple: it compares how much you want to borrow with how much the car is worth.

Understanding LVR can help you work out why a lender may ask for a deposit, why some cars are easier to finance than others and why borrowing more than a car is worth can create problems later.

What does LVR mean?

Your LVR is the size of your loan shown as a percentage of the car’s value.

The basic formula is:

Loan amount ÷ car value × 100 = LVR

For example, imagine you want to buy a car valued at $30,000 and need to borrow $24,000.

$24,000 ÷ $30,000 × 100 = 80%

Your LVR would be 80%.

This means the loan is equal to 80% of the car’s value. You are covering the other 20%, which may come from your deposit, a trade-in or both.

LVR is generally defined as the loan amount compared with the value of the asset being purchased.

A simple way to picture LVR

Think of the car as a pizza cut into ten equal slices.

If the lender is paying for eight slices and you are paying for two, the lender is funding 80% of the car.

That gives you an LVR of 80%.

If the lender is paying for the whole pizza, the LVR is 100%.

If the loan also covers extra costs and becomes larger than the car’s value, it could be more than 100%.

Why does LVR matter to a car lender?

A secured car loan usually uses the vehicle as security. This means the lender has a financial interest in the car until the loan is repaid.

If the borrower falls seriously behind on repayments, the lender may be able to repossess and sell the car. However, the amount received from selling it may not be enough to clear the remaining debt.

This is one reason lenders consider LVR.

A lower LVR can mean there is a larger gap between the car’s value and the loan balance. From the lender’s point of view, that may reduce risk.

A higher LVR means the loan is closer to—or possibly greater than—the car’s value. That can create more risk if the car needs to be sold before the loan has been repaid.

Lenders may prefer a lower LVR because it means the amount owed is smaller compared with the vehicle’s current value.

LVR is only one part of a car loan application. A lender may also look at your income, expenses, existing debts, credit history, employment and ability to afford the repayments.

What is considered a good LVR for a car loan?

There is no single LVR that every lender considers “good”.

Each lender has its own rules. The acceptable LVR may also depend on:

• whether the car is new or used
• the age of the vehicle
• the make and model
• the kilometres travelled
• the car’s condition
• where the car is being purchased
• your credit profile
• your income and expenses
• whether extra costs are being added to the loan.

In general, a lower LVR is less risky than a higher one.

For example, an 80% LVR normally gives the lender more protection than a 120% LVR. However, a low LVR does not automatically mean a loan will be approved, and a high LVR does not automatically mean it will be declined.

The lender must still assess the complete application.

Can a car loan have an LVR above 100%?

Yes. A car loan can have an LVR above 100%.

Imagine a lender values a car at $25,000, but you want to borrow $28,000.

$28,000 ÷ $25,000 × 100 = 112%

The LVR would be 112%.

This can happen when the loan includes more than the value of the car. For example, the amount borrowed might also include:

• lender or broker fees
• registration costs
• insurance products
• warranties
• accessories
• an amount still owing on a trade-in.

It can also happen when the purchase price is higher than the lender’s valuation.

A lender does not always use the price shown on the car’s window or sales contract. It may complete its own valuation using information about the car’s age, variant, condition, kilometres and expected market value.

Purchase price and car value are not always the same

Suppose a dealership agrees to sell you a car for $32,000, but the lender values it at $29,000.

If you want to borrow the full $32,000, the lender may calculate your LVR using its $29,000 valuation:

$32,000 ÷ $29,000 × 100 = 110.34%

Your LVR would be about 110%, even though you are borrowing the exact purchase price.

This is important because paying a certain price does not prove that the car is worth that amount to a lender.

A price can be affected by dealer charges, optional extras, demand, location and negotiation. A lender’s valuation may be more cautious.

How can a deposit reduce your LVR?

A car loan deposit reduces the amount you need to borrow.

Imagine you are buying a car valued at $40,000.

With no deposit

Loan amount: $40,000
Car value: $40,000
LVR: 100%

With a $4,000 deposit

Loan amount: $36,000
Car value: $40,000
LVR: 90%

With an $8,000 deposit

Loan amount: $32,000
Car value: $40,000
LVR: 80%

The larger deposits produce lower LVRs because less money is being borrowed against the same car.

A deposit may also reduce your repayments and the total interest charged over the loan term. However, it is still important to keep enough savings available for emergencies and other costs.

How does a trade-in affect LVR?

A trade-in can work like a deposit if it has positive equity.

Positive equity means your current car is worth more than the amount you still owe on it.

For example:

Current car’s trade-in value: $15,000
Existing loan payout: $10,000
Positive equity: $5,000

That $5,000 may be put towards your next vehicle, reducing how much you need to borrow.

However, the opposite can also happen.

If your car is worth $15,000 but its loan payout is $19,000, you have $4,000 in negative equity.

If that $4,000 is added to your new car loan, your new loan will be larger. This may increase your LVR.

What is negative equity?

Negative equity means you owe more on the loan than the car is currently worth.

For example:

Remaining loan balance: $28,000
Current car value: $23,000
Negative equity: $5,000

If you sold the car for $23,000, you could still owe the lender $5,000.

Cars usually lose value as they get older. A loan balance also falls as repayments are made, but it may not fall at the same speed as the car’s value.

Negative equity is more likely when:

• the starting LVR is high
• little or no deposit is paid
• extra costs are added to the loan
• the loan has a long term
• the car loses value quickly
• a balloon payment is included
• an old loan balance is added to a new loan
• the car is damaged or has travelled unusually high kilometres.

Does a lower LVR mean a lower interest rate?

It may help, but it is not guaranteed.

Some lenders use risk-based pricing. This means the interest rate offered can depend on several details about the borrower, the vehicle and the loan.

LVR may be one of those details. Other factors may include:

• credit history
• income stability
• employment type
• loan term
• vehicle age
• whether the loan is secured
• the lender’s own pricing rules.

Secured car loans may have lower rates than unsecured personal loans because the vehicle is used as security, although actual products, rates and eligibility rules vary.

A lower LVR does not promise a particular interest rate. The lender will assess the full application before making an offer.

Can LVR affect refinancing?

Yes. When you refinance a car loan, a new lender may compare your current payout amount with the car’s current value.

For example:

Current loan payout: $26,000
Current car value: $22,000
LVR: approximately 118%

A lender may consider this a higher-risk refinance because the debt is greater than the vehicle’s value.

You may need to contribute money to reduce the loan amount. Alternatively, the lender may decide the application does not fit its rules.

Before refinancing, it is also important to compare:

• the new interest rate
• the comparison rate
• establishment and ongoing fees
• early repayment or exit costs
• the new loan term
• the total amount repayable.

A lower monthly repayment is not always a better deal. Extending the loan over more years could mean paying more interest overall.

How can you lower your car loan LVR?

There are several ways to reduce LVR before taking out a loan.

Save a larger deposit

A larger deposit means you borrow less.

Choose a less expensive car

Buying a cheaper vehicle may reduce both the loan amount and the repayments.

Use positive trade-in equity

If your existing car is worth more than its loan payout, the difference may reduce the next loan.

Pay extra costs yourself

Paying registration, accessories or other expenses separately may stop them from increasing the loan amount.

Avoid adding negative equity

Rolling an unpaid balance from an old car loan into a new loan can increase the new LVR.

Check the car’s value

Research the market value before agreeing to a purchase price. Look at similar vehicles with the same year, variant, kilometres and condition.

Negotiate the purchase price

A lower price may reduce the amount you need to borrow. However, the lender may still use its own valuation when calculating LVR.

LVR is important, but affordability matters more

A low LVR does not make an unaffordable loan safe.

Before borrowing, consider whether you can comfortably cover:

• loan repayments
• registration
• comprehensive insurance
• fuel or charging
• servicing
• tyres
• repairs
• tolls and parking
• unexpected expenses.

Car loan costs can vary significantly between lenders, including differences in interest rates and fees.

It is worth comparing the total cost of different loans rather than looking only at the advertised rate or weekly repayment.

Questions to ask before accepting a car loan

Before signing a loan contract, ask:

1. What value has the lender placed on the car?
2. What is the LVR of the proposed loan?
3. Are fees or extra products being added to the loan?
4. What is the interest rate and comparison rate?
5. How much will I repay over the full loan term?
6. Is there a balloon payment at the end?
7. Can I make extra repayments?
8. Are there early repayment fees?
9. What happens if I sell or trade the car early?
10. Could I still owe money if the car is sold?

Make sure you understand the answers before proceeding.

The key points to remember

LVR compares the amount you borrow with the lender’s value of the car.

A lower LVR usually means you are borrowing less compared with what the vehicle is worth. A higher LVR may increase the chance of negative equity and may affect which lenders or loan products are available.

You may be able to lower your LVR by contributing a deposit, choosing a less expensive vehicle, using positive trade-in equity or paying extra costs separately.

Most importantly, LVR is only one part of a car loan. You should also consider the repayments, interest, fees, loan term and total cost.

A car may help you get where you need to go, but the loan should also fit comfortably within your budget.

General information only. This article does not provide personal financial advice, and loan approval is subject to eligibility, affordability assessments and individual lender criteria.