Loan-to-Value Ratio (LTV) Definition: This ratio, LTV or Loan-to-value ratio, is what lenders use to decide whether a potential consumer is worth the risk. This ratio is typically used for secured loan applications and measures the value of an asset used to secure a loan, also known as collateral, and the value of the loan.
In most cases, the collateral, or asset, used to measure against a loaned amount is a car or property. This ratio gives the lender a solid assessment of whether the collateral is worth using in the secured loan or if its value isn’t enough, which can create more risk if the loan defaults.
Mortgages are an example of how the LTV is used to determine if an individual is eligible. LTV is calculated as follows: (Amount owed on loan/appraised value of the asset) x 100.