Loan to value ratio
Also called: LTV
Loan to value ratio compares the amount of financing to the value of the asset securing it, expressed as a percentage.
Loan to value ratio, usually shortened to LTV, measures how much you are borrowing against the value of the collateral. You calculate it by dividing the financing amount by the appraised or market value of the asset, then multiplying by 100. If you borrow 80,000 dollars against equipment worth 100,000 dollars, the LTV is 80 percent. Lenders use LTV on secured financing, such as commercial real estate or equipment, to understand how much cushion they would have if they had to sell the asset to recover the balance.
A lower LTV means more of your own money is in the asset, which lowers the lender's risk and can lead to better rates and easier approval, while a high LTV leaves the lender with less margin and may bring higher pricing or a request for more collateral. To improve your LTV, you can put more money down, borrow against an asset with a higher or well documented value, or pledge additional collateral. Lenders often set maximum LTV limits that vary by asset type and product.
Common questions
How do I calculate loan to value ratio?
Divide the financing amount by the value of the asset securing it, then multiply by 100. A loan of 80,000 dollars on an asset worth 100,000 dollars gives an LTV of 80 percent.
Why does a lower LTV help me?
A lower LTV means you have more equity in the asset and the lender carries less risk, which can translate into better rates and a smoother approval.
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