Finance: What is Loan To Value (LTV)?

What is the loan-to-value ratio? Loan us some of your time and watch this handy video.

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Transcript

00:25

Three hundred grand over four hundred grand or three over

00:28

four or seventy five percent Well what does that mean

00:31

Like why do we even care about loan to value

00:34

ratio Well because they speak volumes as to how risky

00:37

the loan is to the bank or whoever is lending

00:41

the dough in this transaction Should you know things go

00:44

awry like you get hit by bus and you can't

00:46

pay it back How does a bank it's loan back

00:49

So you want a low loan to value ratio if

00:53

you're the lender because well the worst thing that happens

00:56

is that you repossess whatever the asset was that was

00:59

pledged as collateral against a loan You just sell it

01:02

to somebody else So what are the odds You could

01:03

get your money back if you're the bank who loan

01:06

three hundred grand against a home that just sold for

01:08

four hundred grand Could you drop the price tow three

01:11

eighty and then pay twenty thousand dollars in realtor costs

01:14

and all the stuff that goes with it And then

01:16

you're down to three sixty and maybe there's some other

01:18

costs and their ten grand or so you get all

01:21

your three hundred thousand dollars loan back and probably fifty

01:24

grand to boot and in theory that might go to

01:26

the cellar but it probably all go to the banks

01:28

lawyers So this equation works great with homes because over

01:31

time holmes generally go up in value knock down because

01:35

there's more people coming onto the earth again and again

01:38

just checked global warming if you're curious about that So

01:40

holmes worked great for mortgages and generally accrue lower loan

01:45

to value ratios over time But how does this work

01:48

when you take out a car loan Yeah cars are

01:52

essentially never an investment They're just a money pit They

01:55

just go down in value So you really wanted that

01:59

forty two two thousand dollars convertible prius with the turbo

02:02

charging battery which gave it a zero to sixty rating

02:05

of seven point eight seconds rather than the standard prius

02:09

Rating zero to sixty of just yes problem You put

02:13

ten thousand down and borrowed thirty two grand on what

02:15

you hoped would be a five year loan Unfortunately six

02:19

months after you drove off the lot the market value

02:21

of your turbo prius is only something like thirty thousand

02:25

dollars maybe less And in that time period you've only

02:28

paid four thousand dollars of principal down on your loan

02:31

So you still owe twenty eight thousand bucks on an

02:35

asset that today would sell form them maybe thirty and

02:38

after commissions transaction costs and lawyer hassle Well it'd certainly

02:42

be worth less than that much money toe whoever had

02:45

to repossess the car and then sell it that's why

02:48

they charge you so much interest rate on car loans

02:51

and only can't blame him Cars suffer this very difficult

02:54

loan to value equation all the time and it's part

02:57

of the reason that car loans air made so difficult

03:00

especially when you go through a dealer and why they

03:03

push you hard to put down a whole lot of

03:05

money up front So the big idea here hi l

03:07

tvs are bad low lt v's are good lenin doubt 00:03:11.5 --> [endTime] Go turbo