Why will lenders lend only a certain percentage of the value of a transaction?

Expert Solution

Lenders only lend a certain percentage of the value of a transaction in order to mitigate the risk associated with bad debts. Since lending money is risky due to the prospects, uncertainty and contingencies thus lenders analyse and determine the risk that a loan carries, which reflects the degree to which the borrower can default. Thus through only lending a certain percentage of value of a transaction the lender reduces its risk. This percentage of value lent is called LTV (loan to value)

For example; An individual asks the lender to provide him the mortagage of about $300,000 and from the money individual wants to buy a house, then the lender will agree to lend about 225000 which is about 75% of loan while asking lender to pay 25% out of his pocket. Hence LTV = 75%

The higher this LTV , the higher are the chances of individual to default.... And lenders chose this percentage of value very carefully to mitigate the risk as more the equity and claim of individual in that property, more is the chances that lender will not face losses.

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Thanks dear student.. Hope this helps..

keosha answered 7 months ago

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