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Finance allah shmoop What is the loan to value ratio

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or ltv All right Well this is the value of

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your house for hundred grand This is your down payment

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one hundred grand And this is your loan of three

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hundred grand loan to value Yeah It's a fraction easy

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Three hundred grand over four hundred grand or three over

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four or seventy five percent Well what does that mean

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Like why do we even care about loan to value

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ratio Well because they speak volumes as to how risky

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the loan is to the bank or whoever is lending

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the dough in this transaction Should you know things go

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awry like you get hit by bus and you can't

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pay it back How does a bank it's loan back

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So you want a low loan to value ratio if

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you're the lender because well the worst thing that happens

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is that you repossess whatever the asset was that was

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pledged as collateral against a loan You just sell it

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to somebody else So what are the odds You could

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get your money back if you're the bank who loan

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three hundred grand against a home that just sold for

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four hundred grand Could you drop the price tow three

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eighty and then pay twenty thousand dollars in realtor costs

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and all the stuff that goes with it And then

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you're down to three sixty and maybe there's some other

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costs and their ten grand or so you get all

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your three hundred thousand dollars loan back and probably fifty

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grand to boot and in theory that might go to

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the cellar but it probably all go to the banks

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lawyers So this equation works great with homes because over

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time holmes generally go up in value knock down because

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there's more people coming onto the earth again and again

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just checked global warming if you're curious about that So

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holmes worked great for mortgages and generally accrue lower loan

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to value ratios over time But how does this work

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when you take out a car loan Yeah cars are

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essentially never an investment They're just a money pit They

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just go down in value So you really wanted that

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forty two two thousand dollars convertible prius with the turbo

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charging battery which gave it a zero to sixty rating

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of seven point eight seconds rather than the standard prius

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Rating zero to sixty of just yes problem You put

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ten thousand down and borrowed thirty two grand on what

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you hoped would be a five year loan Unfortunately six

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months after you drove off the lot the market value

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of your turbo prius is only something like thirty thousand

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dollars maybe less And in that time period you've only

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paid four thousand dollars of principal down on your loan

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So you still owe twenty eight thousand bucks on an

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asset that today would sell form them maybe thirty and

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after commissions transaction costs and lawyer hassle Well it'd certainly

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be worth less than that much money toe whoever had

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to repossess the car and then sell it that's why

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they charge you so much interest rate on car loans

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and only can't blame him Cars suffer this very difficult

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loan to value equation all the time and it's part

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of the reason that car loans air made so difficult

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especially when you go through a dealer and why they

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push you hard to put down a whole lot of

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money up front So the big idea here hi l

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tvs are bad low lt v's are good lenin doubt 00:03:11.5 --> [endTime] Go turbo

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