Until we're all rich enough to pay for everything in cash, loans are a fact of life. It's how we can afford homes, cars, and other assets.
So how do loan companies decide how much money to give you? You might know that credit scores have something to do with it. But have you heard about LTV?
Despite its intimidating acronym, LTVs are easy to understand. They're almost easier to calculate. But LTVs are one of those factors in the loan business that few know about.
So what does LTV mean? And how does it affect your bottom line? Keep reading to find out.
The acronym LTV stands for Loan to Value. It's a metric that loan companies use to assess how much risk there is in lending you money. They do this by comparing the value of the loan against the value of your asset. This asset can be a home, car, or business related.
The higher your LTV ratio is, the riskier it will be for companies to lend to you. If you're trying to take out a mortgage but you have a high LTV, you might need to also get mortgage insurance. It will also be more expensive for you to borrow the money.
Learning to calculate loan to value is super easy. All you need to do is divide the amount of your loan into the total value of your asset.
Sounds confusing? Don't worry, we'll give you an example.
Let's say you're buying a home worth $200,000. You have a nest egg of $50,000 for the downpayment. But you still need $150,000 for your loan.
To figure out the LTV, divide $150,000 by $200,000.
So now you have an LTV ratio of 75%.
We've answered the question "What does LTV mean?" Now we need to learn why it matters.
To put it in simple terms, a higher LTV ration affects you in a bad way. How?
It makes it harder for you to get approved for loans. Loan companies don't want to lose money, so they don't want to take too many risks.
You'll have to pay more, plus a higher interest rate.
You might have to pay for extra costs like mortgage insurance.
Talk to your loan company about how your LTV affects you.
Every lender looks at LTV from a different angle. Some don't mind higher LTVs. Others refuse to lend out for anything over 80%.
Still, there are a few guidelines. With home loans, 80% is often the number loan companies look for. You could also get a home loan with 97%, but then you need to get mortgage insurance.
Auto loans are different. Companies will give you money with higher LTVs, sometimes even more than 100%.
An LTV is important, but it's not the only thing that matters. You also need:
A decent credit score
Enough income for monthly payments
To assess the value of your asset (are you buying a used or new vehicle?)
If you want more information, like what does LTV mean, then check out our blog. We're working hard to demystify the loan process.
That way, you can get the information and the money you need.
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