Whenever you apply for a loan, whether it is a home loan, a car loan or even a gold loan, for that matter, there’s one number that decides your eligibility—the loan-to-value (LTV) ratio. Simply put, loan-to-value ratio informs the lender how much of the value of the asset you wish to borrow.

In this article, we will see what the LTV ratio for loans is, how it is important in various loan types and how to calculate LTV ratio.

What Is Loan-to-Value (LTV) Ratio?

In simple words, the loan-to-value ratio is the proportion of the loan amount you can borrow against the value of the asset that you are pledging. Higher LTV ratio means you can get more money against your asset.

Basically you have to calculate LTV ratio in:

• Home loans: To decide how much loan you can get on the property you want to purchase.
• Auto loans: To finance new or used cars, where a portion needs to be funded by the buyer.
• Gold loans: Where your jewellery or gold ornaments are kept as collateral.

For example, in India, most lenders will not finance 100% of a home’s value. The maximum they usually give is 75% to 90%, depending on the cost and type of property. This lower percentage reflects their attempt to limit risk.

Why LTV Ratio Matters for Borrowers

From a borrower’s perspective, the loan-to-value ratio directly impacts not only whether your loan is approved but also its terms.

Loan eligibility and borrowing capacity

A lower LTV means you get a smaller portion of the asset’s value. This also means that you have more chances of approval. Since, lenders are giving less money, they will be willing to approve the loan. With a high LTV, the lender may refuse your application or reduce the approved loan amount.

Impact on interest rates and terms

Generally, high-LTV borrowers are charged a higher interest rate because lenders see them as risky. But borrowers with lower LTV scores can negotiate better terms such as lower interest or longer repayment tenure.

Risk if asset value falls

LTV also protects financial institutions in case property or gold prices fall. Let's assume you are keeping gold worth ₹5 lakh and taking ₹4.5 lakh as a loan. If gold rates suddenly fall, the collateral might not cover the loan balance, creating risk for both sides.

Lenders rely heavily on the LTV ratio for loans before approving an application. Knowing this ratio helps you plan your finances better for you as a borrower.

How to Calculate LTV Ratio

Calculating the Loan-to-Value ratio is very easy. The formula is:

LTV= (Loan Amount/Appraised Value of Asset) ×100

Here the loan amount is the money you want to borrow and the appraised value is the value of the asset as determined by the lender or evaluator.

Some of the examples of this are:

Suppose you want to buy a flat worth ₹50 lakh. The lender is ready to give you ₹40 lakh as loan.

Here the LTV ratio is:

LTV= (40,00,000/50,00,000) x 100

LTV ratio = 80%

Good vs Risky LTV Ranges

Now that we know how to calculate LTV, let’s understand what is considered safe:

• Home Loans: Up to 80% is generally considered safe. For loans on lower-value homes, lender rules may allow 90%.
• Gold Loans: RBI guidelines cap it mostly at 75%. That means you may not get more than 75% of the gold’s value.
• Auto Loans: Generally 80–90% depending on new or used vehicles.
• Loan Against Property: Usually 50–70% because property resale has risks.

If your LTV is too high, you are borrowing too much of the asset’s value. This increases monthly instalments. This may even put you at risk if asset prices fall. A balanced LTV helps you get money comfortably without overburdening yourself.

Ways to Improve or Optimise Your LTV Ratio

If your LTV ratio is too high, there are also good ways of reducing it and enhancing your loan application:

• Boost down payment: Pay more from your own savings such that you borrow less. This reduces your LTV immediately.
• Improve asset value: For property loans, maintain proper documents, upkeep your property and ensure the valuation shows true worth.
• Borrow only as much as you require: Do not over-extend your loan because you can borrow more. Borrowing less lowers LTV and interest load.

Conclusion

The Loan-to-Value ratio may look like a small percentage, but it plays a big role in your loan journey. From deciding eligibility and down payments to dictating your interest rate, LTV becomes the number that borrowers and lenders must respect. Before applying for any loan, calculate your own LTV ratio or use a simple loan-to-value ratio calculatoronline. This will give you clarity about how much loan you can realistically get and what additional money you need to bring in.

By keeping your LTV in check, you ensure not just loan approval but also peace of mind in repayment.

FAQs

What is a Loan-to-Value (LTV) ratio?

It is the proportion of value of an asset that the lender gives as loan.

Why is the LTV ratio significant for loans?

Because it indicates the risk of lender and decides the borrower's eligibility, interest rate, and down payment.

How do you compute the LTV ratio?

Divide the loan amount by the appraised value of asset and multiply by 100.

What constitutes a good LTV ratio?

Approximately 70–80% for home loans, 75% for gold loans, and 70% for loan against property.

How does LTV impact loan eligibility?

Low LTV enhances chances of loan approval, whereas high LTV can result in rejection or increased interest.

What is the highest LTV that is permissible for a mortgage?

In India, it is typically 90% for low-cost housing, otherwise limited to 75–80%.

How can I reduce my LTV ratio?

Put more down payment and ensure proper valuation of your asset.

How will LTV affect interest rates on a loan?

Borrowers with high LTV tend to pay more interest, whereas low LTV borrowers get lower rates.