Wednesday, January 14, 2009

Loose Credit and Autos

Googling the following term 'Loan to Value Auto' and the first applicable result (3rd overall) is a page at RoadLoans. This site provides an explanation as to what Loan to Value "LTV" means, using an example of an individual borrowing more than the value of the car.

LTV is a calculation that shows the amount you borrow as a percentage of the book value of the vehicle* you are purchasing. For example, if you borrow $15,000 on a vehicle with a value of $13,000, the LTV would be 115.3% ($15,000 divided by $13,000).
And that is exactly what happened. In September 2006, the AVERAGE loan was larger than the value of the underlying vehicle for the first time on record, which in turn helped the auto companies sell vehicles to those who probably couldn't afford the actual car and led to strong business at the autos (GM stock doubled between March 2006 and November 2007).

That is until the house of cards came tumbling down.

Source: Federal Reserve

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