Loan to Discounted Value
How is it calculated?
Loan to Discounted Value = Loan Amount / (Collateral Value x Advance Rate)
Goal of the Ratio
The goal of this ratio is to gauge the strength of the collateral position of a particular loan by comparing the loan amount to the value of the collateral after a allowable advance rate has been applied to the collateral value. This advance rate is based on what percentage of value the bank would anticipate receiving if the collateral was ultimately liquidated.
When is it used?
Any loan situation.
Rules of Thumb
Lower is better - A lower ratio indicates there is proportionally more collateral value present than loan dollars.
Pitfalls of this Ratio
The Loan to Discounted Value Ratio, though valuable, poses a pitfall due to its infrequent usage, potentially causing confusion for approving officers. This arises from the distinction that, unlike Loan to Value (LTV), where the goal is to have the ratio less than or equal to the allowable advance rate, for the Loan to Discounted Value, the target is 100% or less.
Clarity is essential to prevent confusion in discerning the calculated ratio, ensuring accurate decision-making.
What changes in the ratio could mean:
- Amortization of loan will cause the ratio to decrease
- Changes in collateral value
Other Relevant Terms
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