Business A Comprehensive Guide To Loan To Value With Its Meaning JohnDecember 13, 20220178 views Loan-to-value ratio plays a vital role when a borrower applies for a secured loan by pledging his/her property as collateral. Calculating this ratio allows a financial institution to determine a loan amount it can sanction to a borrower. Continue reading this article to know more about the meaning of loan-to-value ratio and more. Meaning of loan-to-value When sanctioning a loan application, financial institutions determine exact percentage of current market value of a pledged property it can offer as a loan amount. This percentage is referred to as loan-to-value or LTV ratio. A lender uses this formula mentioned below to calculate LTV for a certain property: LTV ratio = [Principal loan amount / Value of a property] x 100 Consequently, creditworthiness and eligibility of a potential borrower remain largely dependent on this ratio. Financial experts suggest that it is always ideal if LTV ratio remains below 80%. This way, lenders are likely to charge a lower interest rate to the applicant. On the other hand, if the appraised value of a property is closer to the amount a borrower owes to a lender, he or she will be considered a high-risk borrower by any financial institution. To elaborate, if such a borrower forecloses or defaults on the outstanding debt, then the lender might have to face difficulty in recovering the dues by dissolving the property. Table of Contents How loan-to-value ratio affects the eligibility of a loan against propertyWhy use a loan-to-value calculator? How to use an LTV calculator? How loan-to-value ratio affects the eligibility of a loan against property When an applicant submits an application for a new line of secured credit, a lender will take the LTV ratio of a pledged property into consideration when sanctioning the loan. Consequently, a lower LTV ratio can enhance the chance of a credit request getting approved. Although a higher LTV ratio doesn’t disqualify an applicant from accessing formal credit, it can, however, limit the scope of getting the best terms for the loan. Therefore, a borrower should check whether his or her desired loan amount is leading the loan-to-value ratio to exceed the financial organisation’s disbursal policy. Otherwise, a rejected loan request can negatively impact credit history of an applicant – like reducing his or her CIBIL score. Why use a loan-to-value calculator? Several leading financial institutions in India offer an LTV calculator on their website to help an applicant calculate the approximate amount he or she can borrow as a loan against property. This calculator takes into consideration the following aspects while determining the credit amount an applicant is eligible for: An applicant’s type of employment Value of a property Type of a property Rate of interest charged Repayment tenor of the loan Using an LTV calculator allows a potential borrower to understand his or her total repayment expenditure and monthly instalments payable. Consequently, the applicant can take adequate measures to minimise his/her total spending. For instance, a borrower can pay a lump sum amount to the lender as a downpayment. This way, a reduced principal amount will also decrease the overall cost of borrowing. How to use an LTV calculator? An applicant can use the loan-to-value calculator in these simple steps: Step 1: Open the official website of the lender Step 2: Navigate to ‘Loan against Property Loan-To-Value Calculator’ Step3: Select ‘Salaried’ or ‘Self-employed’ Step 4: Set the value of the property Step 5: Click on ‘Residential’ or ‘Commercial’ as the type of property Step 6: Set the repayment tenor of the loan Step 7: Set the rate of interest charged Finally, the calculator will display the credit value that an applicant can receive by pledging his or her property. That said, several financial institutions in our country extend pre-approved offers on their secured credit facilities, such as LAP and home loans. These offers streamline and expedite the overall loan application process, thereby ensuring a smooth borrowing experience. In addition, this calculator will also display the EMIs that the borrower will need to pay over the repayment tenor. Therefore, understanding the meaning of loan-to-value is quintessential for maintaining economic discipline for borrowers.