What is Loan-to-Value (LTV) Ratio?
The Short Answer
Loan-to-Value (LTV) Ratio explained simply
The Loan-to-Value (LTV) ratio is a key number in financing. It tells you how much of an asset, like a business or real estate, is being financed with a loan compared to its total value. Lenders use LTV to figure out how risky a loan is. A high LTV means the borrower is putting down less of their own money, which can make the loan riskier for the lender. A lower LTV means the borrower has more equity, which is less risky.
Real-World Example
Buying a Business with an LTV
Let's say you want to buy a business valued at $500,000. You get a loan for $400,000. \n\nTo calculate the LTV ratio, you divide the loan amount by the business value:\n\n$400,000 (Loan) / $500,000 (Value) = 0.80 or 80% LTV.\n\nThis means 80% of the business is financed, and you own 20% outright.
Why this matters
LTV matters because it directly affects your ability to get a loan and the terms of that loan. A lower LTV often means better interest rates and more favorable loan conditions. For sellers, understanding a buyer's potential LTV helps gauge their financing strength.
Lenders look at LTV closely. A lower LTV shows you have more skin in the game, which makes you a more attractive borrower. Try to put down as much as you can.
Lenders look at LTV closely. A lower LTV shows you have more skin in the game, which makes you a more attractive borrower. Try to put down as much as you can.
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