How Is the Loan-to-Value (LTV) Ratio Calculated in an Over-Collateralized Loan?

The Loan-to-Value (LTV) ratio is calculated by dividing the loan amount by the market value of the collateral. The formula is LTV = (Loan Amount / Collateral Value) 100%.

For example, if you take a $7,000 loan against $10,000 worth of collateral, the LTV ratio is 70%. In over-collateralized systems, the initial LTV is always significantly below 100%.

A lower LTV ratio indicates a lower risk for the lender, as there is a larger collateral buffer to absorb price volatility before the loan becomes undercollateralized.