Loan Against Shares Loan-to-Value Ratio (LTV)

Understand what is Loan-to-Value ratio while applying for a loan against your securities.
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Loan Against Shares Loan-to-Value Ratio (LTV)
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3 mins read
23-May-2024

Considering various financing options, taking a loan against shares stands out for several reasons. Here is why you might consider it:

  • Immediate liquidity: Access funds quickly without selling your investments.
  • Preserve investment benefits: Retain potential appreciation and dividends of your shares.
  • Cost-effectiveness: Enjoy lower interest rates due to the collateral nature of the loan.
  • Simplicity and flexibility: Benefit from straightforward processes and flexible repayment terms.

To explore more about leveraging your investments through a loan against shares, consider how it can fit into your financial strategy.

What is Loan to Value ratio for shares?

The Loan to Value (LTV) ratio for shares is a crucial metric used by lenders to determine the amount of loan they can offer against your share holdings. It represents the percentage of your share's value that you can borrow against.

Determining factors

  • Market volatility: Shares with high volatility might have a lower LTV to mitigate risk.
  • Share liquidity: Easily tradable shares often have higher LTV ratios.
  • Lender policies: LTV can vary widely between lenders based on their risk assessment protocols.

Importance

Understanding the LTV ratio helps you estimate the maximum loan you might get against your shares, which is pivotal in planning your financial obligations and investments.

How to calculate the Loan-to-Value ratio?

To calculate the Loan-to-Value (LTV) ratio for a loan against shares, you need to determine what portion of your shares' market value can be borrowed. The LTV ratio helps assess the risk level for lenders and can influence the terms of your loan.

Step-by-step calculation

  1. Identify the loan amount: This is the total sum that the lender is willing to lend you based on your shares.
  2. Determine the market value of your shares: This is the current trading value of the shares you are using as collateral.
  3. Apply the LTV formula: The LTV ratio is calculated by dividing the loan amount by the market value of the shares, then multiplying by 100 to get a percentage.

Maximum loan against shares limit

The maximum limit for a loan against shares depends on several factors:

LTV ratio

  • The higher the LTV ratio, the higher the potential loan amount relative to the value of the shares.

Regulatory caps

  • Regulations may cap the maximum loan amount to prevent excessive risk-taking by both borrowers and lenders.

Lender's assessment

  • Lenders consider your financial health, the quality of shares, and market conditions to determine the maximum loan they can safely offer.

Purpose of loan

  • The intended use of the loan can also influence the maximum limit, as lenders might allocate more funds for investment or business purposes compared to personal use.

Minimum loan against shares limit

The minimum loan amount that can be secured against shares is just as important to understand, especially for those looking to meet smaller financial requirements.

Factors influencing the minimum limit

  • Lender policies: Some institutions set a high minimum to offset the administrative costs of managing these loans.
  • Market conditions: In less favorable market conditions, lenders might increase the minimum loan amount to ensure the loan remains economically viable.
  • Borrower's portfolio: The diversity and size of your share portfolio can influence the minimum amount you can borrow.

Strategic considerations

For borrowers, understanding the minimum limit is essential to determine if a loan against shares is a suitable option for their specific financial needs, particularly if they do not require large sums of money.

Conclusion

Loans against shares are a flexible and effective financial tool for leveraging your investment portfolio without liquidating assets. By understanding the LTV ratio, and the maximum and minimum loan limits, you can better plan and utilize these loans to fulfill both short-term needs and long-term financial goals. Always choose a trusted lender and ensure you have a solid repayment plan to manage the loan responsibly.

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Frequently asked questions

What is 70% loan-to-value?
A 70% loan-to-value (LTV) ratio means that the lender is providing a loan that is worth 70% of the property or asset's value, with the borrower providing the remaining 30% as a down payment. This financial metric is used by lenders to gauge the risk associated with the loan. For example, if a property is valued at Rs. 1,00,000, a 70% LTV would result in a loan amount of Rs. 70,000, requiring the borrower to make a down payment of Rs. 30,000.
What does 80% LTV mean?
An 80% LTV means that the loan covers 80% of the total value of the property or asset, with the borrower covering the remaining 20% as a down payment. This LTV ratio is typical in home mortgages and signifies a moderate risk level for lenders. If a property is valued at Rs. 2,00,000, an 80% LTV would equate to a loan of Rs. 1,60,000, with the borrower providing Rs. 40,000 upfront.
How do you calculate loan-to-value?
To calculate the loan-to-value ratio, divide the loan amount by the appraised value or purchase price of the property, and then multiply by 100 to convert it to a percentage. For example, purchasing a house valued at Rs. 2,50,000 with a loan of Rs. 2,00,000 would have an LTV ratio of (Rs. 2,00,000 / Rs. 2,50,000) * 100 = 80%. This calculation is critical for lenders to assess the risk level of the loan.
What is the loan value of a stock?
The loan value of a stock refers to the maximum amount a lender is willing to lend against shares of that stock, typically determined as a percentage of the shares' market value. Factors like stock volatility and market liquidity influence this percentage. For a less risky stock, lenders might offer up to 70% of the stock's value as a loan. Thus, owning Rs. 10,000 worth of such a stock could potentially secure a loan of up to Rs. 7,000.
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