Definition of collateral value
What is the value of the guarantee?
The term collateral value refers to fair market value assets used to secure a loan. The value of collateral is usually determined by reviewing recent selling prices of similar assets or having the asset appraised by a qualified expert.
Key points to remember
- Collateral value refers to the amount of assets that have been put in place to secure a loan.
- Lenders often use this value to estimate the level of risk associated with a particular loan application.
- Various methods of estimating the value of collateral, including the review of comparable transactions, based on tax assessments and consultation with subject matter experts.
Understanding the value of collateral
The value of collateral is one of the key aspects that lenders consider when reviewing applications. secured loans. Under a secured loan, the lender has the right to obtain ownership of a particular asset, called the “collateral“of the loan – if the borrower default values on their obligation. In theory, the lender should recoup all or most of their investment by selling the collateral. Therefore, estimating the value of this collateral is a key step before approving any secured loan.
Loan to value ratios
The size of a secured loan in relation to its collateral value is known as loan to value ratio (LTV). For example, if a bank gives a loan of $ 800,000 in order to buy a house with a collateral value of $ 1 million, then its LTV ratio would be 80%.
Mortgage and home security value
Secured loans can be made against all types of property. One of the most common types of secured loans is the residential mortgage, in which the house is pledged as collateral to secure the mortgage loan. In this situation, if the borrower does not make their mortgage payments, the mortgage lender can sell the house to recoup their investment.
During this time, the collateral value of the house is usually determined by relying on an appraiser specializing in immovable. Other valuation metrics, such as recent tax valuations or comparable transactions, can also be viewed.
Example of guarantee value
Depending on the type of asset used as collateral, collateral value methods may differ. For example, if a loan is guaranteed by listed on the stock exchange stock, then the current market price of those securities can be used to estimate its collateral value.
In other cases, the collateral used may rarely be traded in the market. For example, a borrower may pledge collateral in the form of private equity or alternative assets, such as fine art or rare collectibles. In these situations, an appraiser may need to use specialized valuation methods, such as calculating the value of private stocks using discounted cash flow analysis (DCF). Meanwhile, fine art and other rare items may need to be appraised by specialists familiar with the private collector and auction markets for these types of assets.
Typically, the size of the loan given by a lender ranges from 70 to 90% of its collateral value. For example, in the case of mortgages, lenders have traditionally offered 80% financing, which means the borrower will need to provide 20% financing. advance payment. However, the exact size of the loan will depend on several factors, such as the perceived reliability of its collateral value, the current state of the market and the situation of the borrower. credit rating.