Understanding Loan to Value and how to use it helps you borrow more money with better terms.
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Consider 7 ways, detailed further below to maximize your borrowing strength.
1. Understand Loan To Value, also called LTV.
2. How to use the equity in your assets.
4. Know the risk of loss.
5. Get the highest % funding against collateral.
6. How does credit affect the percentage?
7. How can an appraisal help?
7 ways to use loan to value to help get the money you want.
1. Loan to value: How it works:
LTV is the amount a lender offers as a percent of the value of any asset they take as collateral.
Your business applies for capital. The lender wants collateral as security and tells you real estate is required. Because you need a large business loan, you agree and pledge residential real estate.
Your home is worth $300,000. The lender has a maximum LTV policy of 75% against real estate.
In this example, the maximum amount would be $300,000 X .75%
= $225,000. If your home is free and clear and the lender agrees to a 75% LTV, then expect $225,000.
Example # 2
Instead of real estate, you put up equipment or vehicles. The amount offered will be much lower. 35% to 60% is the most common range, depending on the lender and only based on the equipment they choose to accept. Lenders rarely are interested in all of the equipment available but may take a blanket lien anyway.
You provided an equipment list with $100,000 in equipment. The maximum Loan to value, LTV is $30% but you are only getting $15,000. What happened? The lender likely only is interested in $50,000 of the $100,000 in equipment. As a result $50,000 X .30% = $15,000.
2. Use valued assets to boost your Approval amount.
Example # 1:
A business loan applicant qualifies for $25,000 in business bank statement loans, but they really need $75,000. The borrower pledges their vehicles and construction equipment to try to get more.
The retail value on the equipment is $150,000 and the lender comes back with a 40% LTV. This equals $60,000 combined with the $25,000 the unsecured option. Combining the two, the lender is agreeing to a maximum of $85,000. By using the 40% loan to value against the equipment, the borrower is able to boost the offer by $60,000.
Knowing this, applicants can estimate what lenders will do in advance for the collateral they have. The borrower can use that information to decide if they should apply for an unsecured line, or secured with assets.
Almost all borrowers think they cannot negotiate and do not have any power when it comes to the borrowing process. The borrower does not have the upper hand, but they can get a lot by taking the right steps at the right time.
Negotiate during the request. Even if they decline what you are negotiating for, you may still get other improved terms if you had only asked for them.
Ask for higher amounts, longer terms, better rates and early payoff terms. The lenders is not going to give you better terms unless you ask for them.
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4. Risk – You can lose your valued assets!
First decide if it is worth it to use your assets to get money?
If you must have more money, then you must use your assets. Strong cash flow and credit are the best ways to get an unsecured business or personal loan instead.
The borrower has to decide if the risk they go past due is high and whether they can afford to lose the collateral. The risk is high when the borrower cannot run the business without the equipment.
5. How to get the highest % Loan against the value of assets.
Listed stocks, certificate of deposits and any other liquid security usually brings the highest loan amount. This can be up to 100% because while the balance owed goes down, the value of this collateral does not. Listed stocks is an exception that can decrease in value.
Real Estate also brings a high loan amount as a percent of it’s market value. Most real estate backed transactions are in the 65% to 85% of the market value.
After real estate, percentages drop down a lot. Equipment usually brings between 35% and 50%. Traditional banks rarely makes these types of deals and usually only offer 10% to 15%.
6. How credit affects LTV Loan to value
Credit scores have a strong impact. The same applicant with a 700 credit score may get a higher approval than a 575 credit score with the exact same profile.
Lenders will approve more on secured transactions for borrowers with a higher credit score. Lower credit scores are always considered a higher risk and the numbers go down.
An applicant with a 725 bureau score uses their free and clear commercial property to get financing. The property is worth $1,000,000. They go to a bank that approves a maximum 75% loan to value against real estate.
This applicant that has a 725 credit score gets funding with a 75% LTV, which equals $750,000.
An applicant with a 600 credit score gets a 60% LTV maximum, which equals $600,000. This is common in practice. In this case, an applicant can get $125,000 more or less, depending on their credit score.
7. Valuations: How appraisals fit in
Many asset based loan offers use valuation tables and market estimates to arrive at the amount.
Provide any recent appraisals you have that are less than 6 months old. Doing so should protect you from getting low balled.
Consider ordering an appraisal when you get an approval you think is too far below market value. Lenders tend to make conservative estimates that help them, not you.
FAQ on Loan to Value.
What is Loan to Value?
The amount a lender will offer as a percentage of the market value of assets. Collateral valued at $100,000 with a 60% loan to value may result in an offer of up to $60,000.
How can loan to value help me?
It helps borrowers decide whether to apply for secured or unsecured financing. It also helps them understand what types of collateral give the lender. The biggest benefit is that is brings larger approvals.
What can I do to get a higher offer?
Call the lender and ask what types of collateral they will accept and what percentage they will loan against it. Real Estate will bring the highest amounts.
Why is the lender approving such a low amount compared to the value of my asset?
It is usually because they only offer a maximum percent of the value depending on the type. They want to get their money in case of a default by approving far less than the market value.
Negotiating after you have been approved may get you some concessions in terms from the lender. Ask for a higher amount when you know the offer is too low compared to the market value.
Understanding what loan to value is and how to use it can help you get approvals for higher amounts and terms more favorable to you!