The loan to value ratio is utilised by financiers to assess risk. It’s essentially the loan figure, in comparison to the value of the property or car, expressed in percentage form.
80% loan to value is used as a threshold to determine the amount of risk for financial lenders. 80% or less is considered to be reasonable. It may even enable borrowers with poor credit scores to qualify for finance.
As a loan applicant, you are in a better position if you have invested a lot in the transaction. If you are able to allay fears of default, this is better.
To benefit from the best interest rates, keep in mind that 80% and less is the winning formula. So if a bank is loaning you less than 80% of the loan amount, this represents a lower risk to them.
Friends Lyric and Violet are doing research into which of them is more likely to be approved for a bond.
For Lyric, applying for a R800 000 loan and making a down payment of R200 000 puts him in a much more favourable position than his friend Violet who only has R20 000 to offer. She is likely to pay a higher interest rate because of the high risk that the financier will be taking on her low deposit.
Lyric will have exceeded the 80% loan to value.
If a loan applicant has a poor credit record but has a large deposit amount, they are in a better position to be considered for approval. The bank will consider the applicant a lower risk because they will have offset the risk by paying a deposit.