Your old clunker has finally given up the ghost and you’re in the market for a new set of wheels. You’ve found the car of your dreams and now all that’s left is the paperwork.
You soon find yourself in an office, lost in a sea of acronyms like LTV, DTI, and APR. Before you jump ship, use our easy guide to learn the lingo.
LTV (Loan to Value). Loan to value ratio is the ratio of the loan to the value of the asset purchased, or said another way, the percentage of the car’s value that you are borrowing. For instance, if you want to purchase a car valued at $20,000 and need to borrow $15,000 to do so, your LTV is 75% (15,000 divided by 20,000). You are borrowing 75% of the value of the vehicle.
The higher the LTV, the riskier the loan. However, according to Liz Freed, certified credit union financial counselor, if you have a good credit score, it shows the lender that you might be worth the risk and gives you more buying power.
DTI (Debt to Income). When applying for a loan, lenders will look at your overall debt compared to your income. As you might expect, the lower your DTI ratio is, the more likely you are to receive a loan. That’s another good reason to keep debt and spending under control so they don’t outpace what your income can realistically support.
APR (Annual Percentage Rate). The annual percentage rate of a loan is the amount you will pay to borrow money. APR is quoted in terms of an interest rate. In most cases, the interest accrues on your unpaid balance after each payment.
For example, you want to borrow $10,000 for 5 years at an APR of 7%. At the end of the loan, you will have paid the lender $11,880.60. Before applying for a loan, use our loan calculators to help in your budgeting.
Knowledge is power! When you know the lingo, you become a more informed borrower and consequently, can make better decisions about your next purchase.