What Impacts Your Auto Loan Approval? Loan-To-Value, Debt-to-Income, & Key Factors Explained

Preparing to finance a vehicle? Learn about what lenders consider so you can apply with confidence and avoid surprises.

Financing a vehicle is a big decision – and understanding what lenders look for before you apply can make the process much smoother.

Auto loan approval isn’t based on just one factor. Lenders review several financial details to evaluate risk, determine how much you can borrow, and determine your interest rate and loan terms. Two of the most important metrics are the loan-to-value (LTV) and debt-to-income (DTI) ratios, but they’re only part of the picture.

In this guide, we’ll also explain other key factors that impact your auto loan approval – including how your income, credit history, down payment, and vehicle value all play a role – so you can prepare ahead of time and apply with confidence.

What’s A Loan-To-Value (LTV) Ratio In An Auto Loan?

A loan-to-value ratio in an auto loan is the relationship between the amount you’re borrowing to purchase your new car and the actual value of the car.

Often referred to as LTV, this metric assists lenders in measuring the risk associated with your auto loan. The higher the LTV, the more risk the loan represents.

You can calculate LTV by dividing the loan amount by the vehicle’s value – typically its actual cash value or actual cash – then multiplying by 100 to express it as a percentage.

For example, if you’re purchasing a car worth $25,000 (the car’s actual cash value) and you pay a $5,000 down payment, you will need to apply for a $20,000 car loan. Your loan-to-value ratio is:

$20,000 ÷ $25,000 = 0.80 x 100 = 80% LTV ratio

In some cases, an auto loan LTV can exceed 100% if the loan amount is higher than the car’s actual cash value. This may happen if you roll over negative equity from a previous loan or finance additional costs like taxes, fees, or add-ons.

What’s A Good Loan-To-Value Ratio For Auto Loans?

In general, a lower loan-to-value ratio is more favorable for both you and your lender.

An LTV that’s 80% or lower is typically considered excellent. This shows you’re making a substantial down payment, which can help you qualify for better loan terms, lower monthly payments, and more competitive rates.

Here’s a quick breakdown:

• 80% or less: Excellent – best rates and terms
• 80-90%: Good – slightly higher rates possible
• 90-100%: Fair – higher risk, higher rates
• Over 100%: High risk – least favorable terms

Loans above 100% LTV mean you’re borrowing more than the vehicle is worth, which increases lender risk and often results in higher interest rates. It’s advisable to avoid an LTV over 100%; however, sometimes you may encounter this if you’re trading in a car with negative equity.

Most lenders prefer to see a loan-to-value ratio of 90% or lower, as this provides a buffer against depreciation and helps protect against loss if the loan defaults.

What Does Debt-To-Income For An Auto Loan Refer To?

Debt-to-income (DTI) ratio is another key factor lenders review before approving an auto loan. It measures how much of your monthly income goes toward debt payments and helps determine what payment you can realistically afford.

DTI is calculated by dividing your total monthly debt payments by your gross monthly income, which is your income before taxes are deducted, and multiplying by 100.

Debts usually included in this calculation are other auto loans, student loans, credit cards, personal loans, mortgage or rent, as well as alimony or child support.

For example, let’s say you make $6,000 in gross monthly income and your total debt payments are $2,000. Your DTI would be:

$2,000 ÷ $6,000 = 0.33 x 100 = 33%

Lenders use this percentage to ensure you can comfortably manage a new auto loan payment without increasing your risk of default.

What’s A Good DTI Ratio For Auto Loans?

As a general guideline, a DTI ratio below 36% is considered excellent and demonstrates strong financial health. However, keep in mind that different lenders often have their own set of standards.

Here’s how DTI ranges are commonly viewed:

• Under 36%: Excellent – best loan terms
• 36-40%: Good – favorable terms, possibly slightly higher rate
• 40-45%: Acceptable – stricter terms and higher rates
• Over 45%: High risk – approval less likely

A higher DTI signals to lenders that a large portion of your income is already committed to debt, which increases lending risk.

While most lenders consider your total monthly debt, some will only factor in your vehicle-related debt before approving you for a new auto loan. In these cases, your DTI is sometimes expected to fall under 20%.

Do Lenders Look At Gross Or Monthly Income?

When reviewing your auto loan application, lenders consider both your gross and net (take-home) income.

Gross income – your earnings before taxes and deductions – is primarily used to calculate your debt-to-income ratio.

However, lenders may also look at your net income to understand how much you actually bring home each month. This helps them determine whether your projected auto loan payment fits within your budget.

The Key Factors Considered To Get Approved For An Auto Loan

In addition to your loan-to-value and debt-to-income ratios, car dealerships, credit unions, and auto lenders evaluate several other factors before approving new auto loan applications, including:

Credit Score

Your credit score is one of the most important factors in the approval process. It helps lenders assess your creditworthiness and influences the interest rate and loan terms you may qualify for. A credit score above 750 is considered excellent and will likely yield the best auto loan terms.

Credit scores between 700 and 749 are considered good and can help you obtain an auto loan with favorable terms. However, your interest rate, loan period, monthly payment, and other terms may not be as good as they would be for an excellent score.

Fair credit scores are between 650 and 699. You can still qualify for an auto loan with this score, but your loan will not be as favorable. For example, you may be saddled with a higher interest rate and stricter terms.

Next, a credit score between 600 and 649 is considered poor. It’s still possible to get approved for a loan with a poor credit score, but you’ll pay a steep interest rate and may be required to pay a hefty down payment.

A credit score below 600 is considered bad credit, and you’ll have a hard time getting approved for an auto loan with this score. Some specialized lenders will work with borrowers with bad credit, but you can expect high interest rates and a substantial down payment requirement.

Employment

Lenders will review your employment history – and most prefer to see at least two years of steady employment – to verify income stability. Consistent income and reliable work history strengthen your application.

Borrowers with W2 employment have an easier time getting auto loans; however, self-employed borrowers can still qualify but are usually required to provide additional documentation, such as tax returns or profit-and-loss statements.

Vehicle Value

The value of your vehicle is comprised of its price, age, mileage, condition, and vehicle type. Newer vehicles, especially the purchase of a new vehicle, can impact loan-to-value calculations and typically qualify for the best loan terms, but you can still get approved for great loans on used cars.

Lenders consider the car’s actual cash value when determining loan eligibility and terms, as the car’s market value directly affects the loan-to-value ratio and potential risk.

Down Payment

Lenders generally view larger down payments favorably because they reduce risk. A higher down payment can help you qualify for a lower interest rate, more flexible terms, and lower overall borrowing costs.

Putting more money down also helps protect your equity. With a lower LTV, you’re less likely to owe more than your vehicle is worth, making it easier to sell or trade in down the road. Pairing a solid down payment with a shorter loan term can further reduce the amount of interest you pay over time.

Apply For A Vehicle Loan With A+FCU

At A+ Federal Credit Union, we offer a variety of vehicle loan options designed to fit your needs and budget – so you can finance with confidence.

We provide competitive financing for new and used cars, trucks, motorcycles, RVs, and more. Plus, through our partnerships with dealers across Texas, members can enjoy a smoother, more convenient car-buying experience.

When you’re ready to get started, our team is here to help guide you through the vehicle loan process from application to keys in hand.

Membership required. Normal lending criteria apply. All loans subject to credit approval. Programs, rates, terms, and conditions are subject to credit score, loan-to-value matrix adjustments, mileage, term, and normal credit underwriting factors. We are not currently doing loans for private party sales.