What does "loan-to-value ratio" (LTV) refer to?

The loan-to-value ratio (LTV) is a critical metric used in consumer lending that expresses the ratio of the amount borrowed to the appraised value of the asset being purchased, typically in the context of real estate financing. This ratio helps lenders assess risk; a lower LTV suggests that the borrower has a larger equity stake in the property, which can make the loan less risky for the lender. Conversely, a higher LTV indicates that the borrower is financing a larger portion of the property’s value, which can increase the lender's risk.

Understanding LTV is essential because it plays a role in determining the terms of the loan, including interest rates and whether mortgage insurance is required. Financial institutions often have guidelines regarding acceptable LTV ratios, which affect their lending decisions and the cost of borrowing for consumers.

In contrast, other options refer to different concepts not related to the specific measure of equity related to an asset's value. For example, the total loan amount compared to a borrower's income addresses affordability rather than asset evaluation, while the percentage of a borrower’s assets covered by a loan is not a standard measure in lending. Lastly, the interest rate applied to a loan is a term related to the cost of borrowing rather than the valuation of the collateral