Q. What is Loan to value (LTV) ratio? Manish Kumar, Agra
A. Loan to value (LTV) is the ratio of the loan amount you want to borrow to the actual value of an asset. Suppose, you are buying a home through loan and the value of the property is Rs. 50 lakh. In this case, the LTV works out to be 80%, which means the bank will provide you a loan amount of Rs. 40 lakh.
The purpose of the LTV ratio is to cut the risk of the lender by restricting loan amount to a certain percentage of the underlying asset.
LTV ratio varies for different types of loans. For example, the LTV ratio for housing loan is usually 75% to 90% of the asset value, and the LTV ratio for a loan against gold jewellery is around 50% to 75% of the asset value.
Your lender will decide the LTV ratio based on your credit score, income, and type of underlying collateral asset. If your credit score is low, your lender may increase the LTV ratio to cover the risk. It is important to note here that the age of the borrower also impacts the LTV ratio so a young borrower usually gets a loan with a lesser LTV ratio. Thus, when seeking a loan, do check about the LTV ratio to negotiate lesser interest rates, higher tenure of the loan with your lender.
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