What is Loan-to-Value (LTV)?
Loan-to-value (LTV) is the size of a loan divided by the appraised value of the collateral securing it, expressed as a percentage. A lower LTV means a larger equity cushion protecting the lender.
Also known as: LTV · LTV ratio · loan-to-value ratio
In plain terms
LTV answers one question: how much of the asset is the lender actually financing? If you borrow $300,000 against a building worth $1,000,000, the LTV is 30%. The remaining 70% is value that belongs to the borrower and absorbs losses before the lender is affected.
Lenders use the ratio as a quick risk gauge. The lower it is, the further the collateral can fall in value before the loan is no longer fully covered.
How it works
The formula is loan balance ÷ collateral value × 100. The collateral value usually comes from an independent appraisal or, for liquid assets, a market price. The loan balance can include accrued interest, so LTV drifts upward over time if interest is capitalized rather than paid.
Loan agreements typically set a maximum LTV at origination and a higher maintenance threshold. If the collateral is revalued and LTV crosses that threshold, the borrower may have to post more collateral or repay part of the loan, and continued breaches can trigger default remedies.
LTV is the mirror image of over-collateralization: a 50% LTV means the collateral is worth twice the loan.
Example
Hypothetical: a company pledges a warehouse appraised at $5,000,000 and borrows $1,500,000, a 30% LTV. A year later a new appraisal values the warehouse at $4,000,000 and accrued interest has lifted the balance to $1,600,000. LTV is now 40%. The loan is still well covered, but if the agreement's maintenance threshold were 40%, the borrower would already be at the limit.
Why it matters for founders and investors
For investors in private credit, LTV is one of the clearest indicators of downside protection: it shows how much collateral value must disappear before principal is at risk. Comparing two loans with similar yields but very different LTVs often reveals which one is actually riskier.
For borrowers, a conservative LTV can make financing easier to obtain and cheaper, at the cost of borrowing less against the asset than its full value.
Common misconceptions
A low LTV does not make a loan risk-free. It depends on the appraisal being accurate, the asset being sellable, and the lender being able to enforce its claim. An LTV built on an inflated valuation offers less protection than the number suggests.
Frequently asked questions
What is a good loan-to-value ratio?
There is no universal good LTV; it depends on how volatile and how easy to sell the collateral is. Lenders generally accept higher LTVs on stable, liquid assets and require lower ones on assets whose price can swing or that take long to sell.
How do you calculate LTV?
Divide the loan balance by the current value of the collateral and multiply by 100. A $200,000 loan against an asset worth $800,000 has an LTV of 25%.
What happens if LTV goes up?
If LTV rises above the limit set in the loan agreement, the borrower is usually required to add collateral or pay down the loan. If that does not happen, the lender may be able to declare a default and enforce on the collateral, depending on the contract.