Asset Class

Finance allah shmoop What is the loan to value ratio

or ltv All right Well this is the value of

your house for hundred grand This is your down payment

one hundred grand And this is your loan of three

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

Three hundred grand over four hundred grand or three over

four or seventy five percent Well what does that mean

Like why do we even care about loan to value

ratio Well because they speak volumes as to how risky

the loan is to the bank or whoever is lending

the dough in this transaction Should you know things go

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

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

So you want a low loan to value ratio if

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

is that you repossess whatever the asset was that was

pledged as collateral against a loan You just sell it

to somebody else So what are the odds You could

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

three hundred grand against a home that just sold for

four hundred grand Could you drop the price tow three

eighty and then pay twenty thousand dollars in realtor costs

and all the stuff that goes with it And then

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

costs and their ten grand or so you get all

your three hundred thousand dollars loan back and probably fifty

grand to boot and in theory that might go to

the cellar but it probably all go to the banks

lawyers So this equation works great with homes because over

time holmes generally go up in value knock down because

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

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

holmes worked great for mortgages and generally accrue lower loan

to value ratios over time But how does this work

when you take out a car loan Yeah cars are

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

just go down in value So you really wanted that

forty two two thousand dollars convertible prius with the turbo

charging battery which gave it a zero to sixty rating

of seven point eight seconds rather than the standard prius

Rating zero to sixty of just yes problem You put

ten thousand down and borrowed thirty two grand on what

you hoped would be a five year loan Unfortunately six

months after you drove off the lot the market value

of your turbo prius is only something like thirty thousand

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

paid four thousand dollars of principal down on your loan

So you still owe twenty eight thousand bucks on an

asset that today would sell form them maybe thirty and

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

be worth less than that much money toe whoever had

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

they charge you so much interest rate on car loans

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

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

of the reason that car loans air made so difficult

especially when you go through a dealer and why they

push you hard to put down a whole lot of

money up front So the big idea here hi l

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