Question

What is a loan-to-value ratio? What is a coverage ratio? How can we use these to evaluate loans? Give an example of each.

Answer 1

1. Loan to value ratio is a financial ratio that compares the size of loan to the value of assets which is purchased using the loan.

The lower the loan to value ratio , the better chances of lending are as, that reflects that loan is highly secured with collateral.It is an important metric in determining the lending risk.

2. Coverage ratio is financial ratio which reflects the ability of firm to payoff the Debts. The coverage ratio is reflective of repayment ability of the firm in relation with scheduled repayment.

It is important as the Higher the coverage ratio, the better the chances of recovery of the loan and vice versa.