What is Loan to Value ratio? How to Calculate Loan to Value?

Ever heard of Loan to Value Ration, otherwise called LTV? Well, if not, here we are with a brief guide on what is the loan to value ratio and how you calculate it. For your reference, LTV is quite a popular term in the world of finance and is extremely useful when the business is about real estate and lending. Without any further ado, let’s move ahead and learn more about this technical term.

What Is Loan to Value Ratio?

In simple word, the Loan to Value Ratio (LTV) is a metric that lenders use to check the risk associated with a loan. Here, the loan amount amount is compared to the appraised value of the asset that is being financed. The LTV is calculated in percentage and generalled speaks of how much of an asset’s value is being financed through debt.

For example, if you are looking to purchase a property valued at ₹20,00,000 and you are looking for a mortgage loan of ₹16,00,000, the Loan to Value ratio would be calculated as follows:

LTV = (Loan amount / Appraised Value) x 100

Thus, LTV = (16,00,000 / 20,00,000) x 100 = 80%

So, by this example, you can understand that the LTV ratio is 80%.

Read more: How to apply for a loan without any income proof?

Importance of Loan to Value Ratio

The Loan to Value ratio is a critical factor for lenders because it helps them assess the level of risk associated with a loan. Generally, a lower LTV ratio implies a lower risk for the lender, as it indicates that the borrower has more equity in the asset and is less likely to default on the loan. On the other hand, a higher LTV ratio suggests a higher risk, as the borrower has less equity and is more vulnerable to market fluctuations or financial hardships.

Read more: What is the minimum salary needed to get a personal loan?

How to Calculate Loan to Value Ratio

Calculating the Loan to Value ratio is a simple process as it requires only two pieces of information: the loan amount and the appraised value of the asset. Once you have these figures, you can use the formula mentioned earlier to determine the LTV ratio.

However, if you prefer a more convenient method, numerous online tools, and loan to value calculators are available to streamline the process. These calculators typically prompt you to input the loan amount and the appraised value, after which they automatically calculate the LTV ratio for you.

Now, if getting a home loan seems difficult to you, because of multiple reasons, try getting a personal loan from Airtel Finance.

Why should you choose a personal loan?

Here are some significant reasons why you might opt for a personal loan:

Flexibility in Use

When you get personal loans, you get the flexibility to use them. In other words, you can use a personal loan amount to consolidate your high-interest debt, cover unexpected expenses, or take yourself on a dream vacation.

Consolidating Debt

As mentioned above, you can use the personal loan amount to consolidate your debt. If you have multiple loans under your name with high-interest rates, you can consolidate them into a single personal loan with a lower interest rate. This way you would be able to save quite a lot of money. 

Lower Interest Rates

If you are running short on money, it is always better to avail a personal loan instead of using a credit card. It is mainly because credit cards have higher interest rates and hence, you end up paying a huge sum as interest over the loan period.

Predictable Monthly Payments

One of the significant reasons to go with personal loans is that they come with fixed monthly payments over a pre-decided term. Hence, you would be aware of how much money you need to repay your loan every month. Consequently, you would be able to manage your finances better.

Read more: What are the differences between secured and unsecured personal loans?

No Collateral Required

Personal loans are often unsecured, which means you do not need to put up collateral to get it. This is quite helpful for those who do not have any collateral to provide and those who do not wish to risk it.

Quick Access to Funds

You get quick access to instant cash when you get a personal loan. Once you get your personal loan approved, you get funds directly in your bank account as the process is often streamlined and straightforward.

Conclusion

In essence, the Loan to Value ratio is a fundamental concept in lending, serving as a key indicator of risk for lenders and influencing loan terms for borrowers. By understanding what LTV is, its significance, and how to calculate it, borrowers can make informed decisions when seeking financing for assets such as real estate. Whether you’re a prospective homebuyer or a seasoned investor, grasping the concept of Loan to Value ratio empowers you to navigate the lending landscape more effectively.