Loan-to-Value (LTV) is the ratio of a loan amount to the value of the collateral securing it, calculated as Loan Amount ÷ Collateral Value. A lower LTV means more collateral cover per unit of debt. In secured crowdlending, collateral and a low LTV reduce potential loss if a borrower defaults, but they do not eliminate it.
What Is Loan-to-Value (LTV) in Crowdlending?
LTV, or Loan-to-Value, is one of the most widespread metrics that is used to calculate the risk for the secured lending of different types. Loan-to-Value measures the size of the respective loan in comparison with the offered collateral for this loan. LTV is calculated using the following formula:
LTV = Loan Amount / Collateral Value
The resulting value is then expressed as a percentage. It is worth considering two hypothetical scenarios of LTV calculation in order to understand how it works.
An LTV of 70% leaves a €30,000 collateral cushion; an LTV of 120% leaves part of the loan uncovered.
The first scenario is the following — the investor provides a loan with a total value of €70,000 against the collateral with the market value of €100,000. In this case, the LTV would be 70%, and the remaining sum of €30,000 will be considered a “cushion.” This cushion acts as a buffer and can provide compensation to the investor if the borrower defaults or the claim is sold before maturity with a discount. There are, however, loan enforcement costs that may influence the final compensation, so the recoverable amount matters on a case-by-case basis.
Another scenario implies that the investor provides a loan worth of €120,000. The collateral against the provided loan has a market value of €100,000. In this case, the LTV is 120%. This creates a situation where the part of the loan is not backed up by collateral that increases the risk of capital loss even in case the collateral is fully realized in case of the borrower’s default or other loan-related risks.
Illustrative example only. Collateral value, recovery costs, and timelines vary by case; recovery does not guarantee full repayment.
When evaluating LTV and the secured loan in general, the interpretation matters. Maclear calculates LTV with the formula above, yet the LTV rate below 100% means a more-than-sufficient supply of the collateral against the loan, and the LTV above 100% means a non-sufficient supply of the collateral. A lower LTV is beneficial to the investor because it means that the collateral against the loan supports it more and, therefore, the investor’s funds are more secure in case of the borrower’s default.
Overall, LTV as an indicator should not be viewed out of context, as it provides the indication of what the collateral actually covers in case of the borrower’s default. Yet the LTV does not describe the credit rating of a borrower or the liquidity of the asset itself. It also does not explain what types of procedures need to be taken legally in terms of forcing debt collection in a particular case. Instead, LTV helps the investor consider the financial performance of the secured loan and helps the due diligence of the process too.
How Is the Loan-to-Value Ratio Calculated?
The LTV, or Loan-to-Value ratio, is calculated by dividing the loan amount by the value of the collateral against this loan. If LTV has a lower percentage, it means that the value of the collateral is more than the value of the loan, meaning that the collateral fully covers the amount of the loan or even surpasses it. If LTV is higher than 100%, it would mean that the loan is larger than the value of the collateral, meaning that the loan is not fully supported by the collateral. It is important to remember that the value of the collateral may fluctuate given the price fluctuations on the market, meaning that the actual LTV may change. Therefore, LTV should be fixed at the valuation that has been done at the time when the loan has originated.
How Collateral Works in Secured Crowdlending
Collateral helps to support the loan by providing an asset with its market value against the loan. In case of the borrower’s default, it is possible to sell the collateral to reimburse the investor the funds given for the loan to return it. The legal proceedings and the procedure as a whole require careful examination based on the initial terms of a secured loan, the jurisdiction where the loan has originated and debt collection has been enforced, and the priority ranking.
There is a common misconception about the collateral that sounds like this — the collateral can eliminate the risk of providing a loan. In fact, the collateral cannot fully mitigate borrower default risk, and there are cases where the value of the collateral is lower than the amount of the loan against it; therefore, the collateral does not cover the loan fully. Instead, the collateral is used to mitigate the risks of the borrower’s default by providing some value against the loan in case this risk occurs and giving the lender the claim they can utilize to try and get their funds back.
There are different types of assets that may be used as collateral, including personal vehicles, real estate, liquid or financial assets, business assets (raw materials, machinery, and unpaid invoices from the customers), valuables and collectibles, and insurance policies. The collateral remains a part of due diligence assessment before the secured loan reaches the investor. The collateral’s value, structure, and legal status are evaluated to determine whether the collateral can be accepted as an asset against the loan.
The collateral value in case of the borrower’s default will be distributed based on charge priority, or the hierarchy of the creditors in a given loan. First priority goes to the lenders who have secured a lien and have been the first to secure the charge over the collateral. The second priority is attributed to the lenders who have provided a “second-rank” charge after the first lenders, and they can only receive reimbursement from the collateral after higher-ranking creditors are repaid.
What Types of Assets Are Used as Collateral?
Collateral against the loan may come in various types, including vehicles, property objects, business assets like raw materials, valuables, insurance policies, etc. The type of the collateral is determined based on the specific requirements of due diligence for the collateral against the specific loan, the degree of accepted risk, and the overall structure of the loan.
What Loan-to-Value Ratio Is Considered Good?
Some single scale that can help to determine which LTV ratio is good or bad does not exist because the types of the secured loans, the duration of the claim, the initial terms, and the credit rank of the borrower differ on a case-by-case basis. However, lower LTV ratios can be generally considered a better option for the investor since they increase the margin between the debt owned by the borrower and the price of the collateral. Lower LTV ratios mean that the collateral is more expensive than the loan against it, and, therefore, the borrower-related risk can be partially mitigated, as well as the other loan-related risks like legal costs, sinking in the asset value, and commissions to the platform (in the case of a P2P investment).
Conversely, the investors are generally at a disadvantage if the LTV ratio is higher. This would mean that the collateral provided by the borrower does not fully support the value of the provided loan. This means that the investor has less room for action in case unexpected events occur. The borrower may be unable to reimburse the loan by selling the collateral, which generally increases the borrower-related risk for the investor. Some of the platforms utilize maximum LTV thresholds to avoid excessive risk to one of the parties of a secured loan agreement as part of their underwriting to try and balance the interests of the investor and the borrower. Maclear uses the threshold between 40% and 200% for LTV as a filter in AutoInvest with the supporting Debt-to-Equity (D/E) indicator in the range between 2.0 and 2.5.
What Is a Good LTV Ratio for an Investor?
There is no statistically “good” value for LTV for an investor, as LTV differs based on the risk of the loan, its structure, the borrower’s credit rank, and other factors like expected liquidity. Some platforms like Maclear set specific thresholds for the LTV, like the range of 40–200% for AutoInvest. However, a lower LTV ratio generally favors the investor because it means that the loan is entirely or excessively covered by the collateral against it, which lowers the borrower-default risk. Still, the collateral and a lower LTV do not eliminate the risk of the lending.
What Happens to Collateral When a Borrower Defaults?
Collateral is the asset that is demanded in case the borrower has failed to repay the loan due to default or other circumstances. If the borrower continues to make payments for the loan within the agreed timeframe, there is no need to utilize the collateral. However, in case a default of the borrower has occurred, the following process happens. First, default is declared and recognized; then, enforcement of the collateral begins. Once the second step with the enforcement is done, the collateral is realized. Upon realization, the income from the collateral is distributed according to charge priority, with investors getting partial or full compensation depending on the particular case.
The example of the process can be seen in the Maclear and Vibroedil case. The Vibroedil project was financed in Maclear in three stages with the loan totaling €150,000, secured against the collateral. Later, the company claimed insolvency. Maclear started negotiation with the representatives of the company to reach a private repayment agreement. If this were impossible, Maclear would start soft debt collection after 30 days of delayed payments while providing interest to the lender via the Provision Fund. Maclear would then start the legal debt recovery procedure after 60 days of delay. If the case enters legal proceedings, there is a chance that the investor recovers 100% of the funds. However, this is not guaranteed.
In Vibroedil’s case, the private repayment agreement was reached, and the company reimbursed the lender within a controlled timeframe without the need to use a Provision Fund. Reaching a private repayment agreement was a practical solution since insolvency court cases can be lengthy and last for several years before the case is resolved. Therefore, the settlement through a private repayment agreement in the case of Vibroedil was a faster and more practical option for the investor.
How Long Does the Recovery Process Take?
There is no universal rule that determines how long the process of debt recovery will take. In case of the borrower’s insolvency, especially when the case is complicated, debt recovery may take up to several years. Maclear continues to provide the interest to the investor via the Provision Fund for the first periods of non-payment. After 30 days, soft debt collection begins. After 60 days, the proceedings may become legal under Swiss debt-recovery and bankruptcy law. However, if this is the case, it is important to understand that the proceedings may take a while, whereas the recovery of the funds is not guaranteed.
Collateral, LTV, and the Provision Fund: Layers of Protection
Crowdlending and secured debt rely on multiple mechanisms of risk mitigation. Below is the table that overviews the potential forms of protection.
Mechanism What It Covers What It Does Not Cover Investor Cost Collateral and low LTV Coverage if the borrower enters default and when the collateral is successfully sold Default, the full value of the collateral, full recovery upon legal proceeding Is included in the loan structure Borrower due diligence (risk scoring on a scale from 1 to 10) Borrower quality through UBO verification, credit scoring, assessment of the collateral Future failure of a business, the risk of default Included in the platform’s underwriting Provision Fund A shared reserve from 2% fees on the funded projects to offer temporary payment of the interest Debt repayment, replacement of collateral, investor protection from systematic risks Funded through the fees of the platform Buyback Guarantee The potential repurchasing of the loan by the originator under certain conditions. Industry mechanism: Maclear uses a Provision Fund instead — a shared reserve, not an individual repurchase promise. Investment risk Varies by platform and business Diversification (from the investor’s side) Reduces concentration risk by spreading investment across different assets Macroeconomic risks and systemic risks No direct platform cost
Collateral and LTV only act as a first stage of risk mitigation. Due diligence and internal scoring can support the investor’s selection of the borrower, and the Provision Fund may offer a temporary solution to the payment of interest in case of a default. However, the Provision Fund is not equivalent to a buyback guarantee, and no repurchasing promise follows.
Limits of Collateral: Why Secured ≠ Risk-Free
Collateral reduces, but does not eliminate, the risk of capital loss. Returns are not guaranteed, as the case resolution depends on multiple factors beyond simple use of collateral as the mechanism to repay the investor. Some of the risks that still remain include:
- Valuation risk — the collateral being overrated;
- Illiquidity risk — the collateral cannot provide liquidity;
- Enforcement timeframe and costs;
- The decrease in the price of the asset;
- Jurisdictional complications arising from debt collection;
- Concentration in one type of the collateral.
Therefore, the investor should know that the collateral may mitigate borrower default risk but does not guarantee a risk-free investment and the retention of the lent capital.
FAQ
What is loan-to-value in crowdlending?
Loan-to-Value (LTV) in crowdlending is the ratio of a loan amount to the value of the collateral securing it, calculated as Loan Amount / Collateral Value. A lower LTV means more collateral cover per unit of debt.
How is the LTV ratio calculated?
LTV is calculated by the formula Loan Amount / Collateral Value. It means that the total amount of the loan provided is divided by the value of the collateral against this loan.
What is a good LTV ratio?
There is no universal rule that sets the “best” LTV ratio. However, some platforms (like Maclear) set LTV ratios to compromise between borrower and investor protection by setting the LTV ratio between 40 and 200%. Still, the LTV ratio depends entirely on the particular case of a secured loan.
What types of collateral are used?
Collateral may come in the form of property, a vehicle, collectibles, insurance, or business assets. Each type of collateral provides a different value and depends on the asset’s liquidity, type, term, and pricing.
What happens to my investment if the borrower defaults?
In case of the borrower’s default, Maclear can start soft debt collection after 30 days while maintaining interest payments via the Provision Fund. In case of a 60-day or more delay, Maclear can start legal debt collection proceedings. If the loan were secured against the collateral, it could be sold, and, if sold successfully, the funds would be distributed among the investors according to charge priority.