What is LTV in a secured loan? Does it apply to personal loans as well?

Reserve Bank of India (RBI) recently changed the gold loan rules, according to which the borrower will be required to submit the ownership proof at the time of raising funds against the jewels. The lenders should also ensure that the loan to value (LTV) ratio does not exceed 75 percent of value including interest accrual.

However, the LTV rules will come into effect for the loans which are above ₹2 lakh of value.

Loan to value (LTV) ratio is the percentage of value of gold which lenders are willing to give as loan. For instance, when the value of loan is ₹1 lakh and LTV ratio is 70 percent, then the maximum loan one can avail is of ₹70,000.

Why does it matter?

LTV is an important metric used at the time of determining the loan amount. A lower LTV (for example 60 per cent) means a lower risk for the lender, which often leads to better interest rates and no requirement for loan insurance. A higher LTV (for example above 80 per cent) means higher risk, which may lead to higher rates or stricter loan terms.

Does it apply in the case of a personal loan?

Loan to value is a metric which applies in case of secured loans only. In case of unsecured loans such as personal loans, banks determine the amount of loan based on loan repayment capacity. 

For instance, in the case of a personal loan, the amount of loan decided by the bank is a function of the borrower's earning capacity. This means loan to value does not apply in case of personal loans.

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