What is Loan Value?

Loan value is the highest amount of credit that a lender is willing to extend, given the value and nature of the asset that is used to secure the loan. The assessment of loan value is a common step when considering the granting of any type of secured loan, including a mortgage where the acquired property serves as the security. Even when loans are made against life insurance coverage, the current cash value of the policy is used to determine the loan value of the transaction.

When determining the loan value for a mortgage, the lender will look closely at the value of the property under consideration. In order to minimize the degree of risk associated with granting the loan, the lender normally writes the mortgage for an amount that is a certain percentage less than the actual market value of the property. This helps to ensure that, should the borrower default on the mortgage at some future point, the lender still stands a good chance of recouping the original investment, after foreclosure proceedings are completed and the lender has clear title to the property.

The same general principle of loan value applies when borrowing cash against the value of a life insurance policy. The insurer will consider the current cash value associated with the policy and extend the insured party a loan for a maximum percentage of that cash value. Should the debtor die before the loan is repaid in full, the outstanding balance is deducted from the benefits due to the beneficiary or the debtor’s estate, and the remainder is then forwarded according to the provisions of the policy.

Loan value also is assessed when it comes to lending money for use in investing activity. Many brokers will allow credit-worthy clients to establish what is known as a margin account. Essentially, this approach allows the investor to utilize credit extended through the broker to purchase stocks, bonds, and other types of securities. The investor is responsible for paying off the amount that is borrowed according to the terms set by the lender. In the event that the investor is unable to do so, any collateral pledged as support for the extended credit reverts to the lender, thus settling the outstanding debt.

Most nations have specific regulations that govern the process of calculating loan value in various industries and application. Those regulations are usually enforced by regulatory agencies, as well as watchdog groups within those industries. This process helps to ensure that the assessment of loan value is somewhat uniform, and thus allows the creditworthiness of every individual to be evaluated using the same criteria.