LTV what it is,
how to calculate and use it at your advantage
What is it the LTV o LVR?
By LTV or LVR we mean “Loan to value ratio” that is defined as the ratio between the amount of the requested loan and the value of the assets placed as a guarantee, expressed as a percentage.
It is one of the main indicators used by credit institutions and p2p leniding platforms to assess whether or not to allow a loan, decide its degree of risk and define its interest rate.
The higher the LTV, the greater the risk taken by the lender, and the lower the LTV the lower the lender’s risk.
How to calculate it? A simple example
The LTV is calculated dividing the value of the asset given as a guarantee by the value of the loan requested and multiplying the result by 100:
LTV = asset_value / loan_value * 100
But the best way to understand the mechanism is through an example: let’s say I require a 120K loan to buy a 120K house. In this case
LTV = 120 * 100 / 120 = 100%
The bank would almost certainly refuse me the loan because the asset putted up as guarantee covers just the value of the loan and therefore the bank would have no profit at all, but if I asked for only 90K of loan
LTV = 90 * 100 / 120 = 75%
In this case we would have a much better chance of getting the loan. Banks usually like to fund a person who has an LTV between 50% and 80%.
LTV in the p2p lending universe
What are these notions good for those who use social lending platforms? Simple: to do the same due diligence the banks does to evaluate the degree of risk of the loans we are buying.
In many platforms you will notice that this value is included in the loan details: the lower the LTV the better cause, in the event of insolvency, the lenders will be able to recover part of the capital from the sale of the asset that is used to guarantee the loan, therefore be careful to the details and good investments.