There are a few factors that can make LTVs misleading and sometimes lead us and our borrowers into a false sense of security.
Do you divide amount financed by MSRP or NADA Clean Retail? If it fits in your grid then loan is approved?
Most of us don’t have the time or expertise to calculate the “real LTV”. We do, however, recognize that MSRP doesn’t usually reflect the true value of a new car due to incentives and other market factors. And, unless we get pictures and do a full inspection on used cars, can we really be confident it qualifies as clean?
These are just a couple of the factors that can make LTVs misleading and sometimes lead us and our borrowers into a false sense of security. We are well aware that vehicles experience significant depreciation as soon as they are driven off the lot. In many cases, however, when we use artificial values as the basis for our LTV calculations, the vehicle experiences significant depreciation even before it is driven off of the lot.
To illustrate the issue of misleading LTV¹s, we recently paid a GAP claim of $7,568 on a 2014 Chevrolet Impala that was financed new at 94% LTV and was totaled 18 months later. It would have been easy to assume that this vehicle would have been “above water” by this time and to even have dismissed this loan as having much need for GAP since they put a couple thousand dollars down, but that would have been a big mistake. If you are making a loan with an LTV of greater than 80% LTV then there is a good chance that they could experience a deficiency balance and benefit from GAP.