Secured loans are loans backed by a collateral or security. If the borrower defaults on loan repayment, the lender can sell the pledged property for recovery of loan money, however only after intimating the borrower well in advance and giving them ample time to clear the pending amount and safeguard their property. Loans against property and home loans are both examples of secured loans.
In the case of secured loans, the collateral is important and the terms and conditions of the loan depend on the quality of the collateral to quite a large extent. Properties located in upscale areas or modern gated communities have higher resale value than old properties in bad condition or those located outside the city limits.
Individuals applying for property loans or home loans must also understand the concept of the LTV ratio. The LTV ratio refers to the percentage of a property's current market value that has been sanctioned as a loan. The LTV ratio is calculated using the following formula:
LTV Ratio = (Loan Value/Current Market Value of the Property) x 100
The LTV ratio is important as it is another thing that helps lenders decide the terms and conditions of a loan. High LTV ratio loans involve a substantially high loan amount and therefore, the risk of loan default is much higher in the case of high LTV ratio secured loans. Therefore, lenders charge a high rate of interest on high LTV ratio loans. On the other hand, low LTV ratio loans give borrowers high negotiating power, allowing them to negotiate for more favourable loan terms and conditions, such as low-interest rates and a repayment tenor that is favourable to the borrower. Borrowers must therefore try and opt for low LTV ratio loans.
If you are not sure about how to calculate the LTV ratio, you can use a LTV ratio calculator.
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