Loan-to-Value (LTV) Ratio: Meaning, Formula, and How to Calculate It

Understanding the Loan-to-Value (LTV) ratio is essential when securing financing. It measures the loan amount against the asset’s market value. A lower LTV ratio typically translates to better loan terms—lower interest rates, smaller down payments, and reduced risks for lenders.

In India, with a 13% growth in loan values and 1,28,000 startups in 2024, understanding LTV is critical. Knowing this ratio empowers you to negotiate favorable loan terms for your business or property investment, making it easier to access capital.

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What is LTV Ratio and Why Does It Matter?

LTV ratio helps lenders assess risk. A lower ratio means more equity from the borrower, reducing the lender's risk. For startups in India, where funding surged 53% in 2024, grasping LTV fundamentals can improve your loan approval chances and secure better terms.

Understanding LTV also allows businesses to optimize cash flow by reducing the amount they borrow. A strong LTV ratio increases access to more favorable loans and terms.

How to Calculate LTV Ratio:

The LTV ratio formula is straightforward:

Example:

For a startup valued at ₹1 crore, seeking ₹70 lakh in financing:

LTV Ratio = (70,00,000 / 1,00,00,000) × 100
= 70%

This shows the loan covers 70% of the asset’s value, leaving 30% equity with the borrower—reducing the lender’s risk.

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How LTV Impacts Loan Terms

• Approval Chances: A lower LTV enhances loan approval chances.
• Interest Rates: A higher LTV often results in higher interest rates.
• Down Payment: A higher LTV reduces the down payment, but increases debt.
• Private Mortgage Insurance (PMI): High LTVs may require PMI, adding to costs.

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Factors Affecting LTV Calculation

1. Asset Type: Equipment and real estate loans have different LTV limits.
2. Creditworthiness: A higher credit score can improve the LTV ratio.
3. Market Conditions: A booming economy may allow higher LTVs, while a downturn leads to stricter ratios.

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Strategies to Optimize Your LTV Ratio

1. Increase Your Down Payment: The more you pay upfront, the lower your LTV.
2. Choose Affordable Properties: Reduces your borrowing needs, keeping LTV in check.
3. Boost Your Credit Score: Improves your loan eligibility and LTV ratio.

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Conclusion

Managing the LTV ratio directly impacts your loan terms and future financial flexibility. A lower LTV can help secure better loan conditions and reduce monthly payments, improving cash flow for startups and businesses.

Recur Club can be your partner for founders looking to secure the best financing for their business. 

With access to over 125 lenders and personalized guidance, we help simplify your funding journey and ensure you get the best terms. 

Let Recur Club be part of your growth story!