LSR stands for Loan to Security Ratio in terms of banking. It’s also referred to as LTV (Loan to Value Ratio) or LTC (Loan to Cost Ratio). Either way, this term plays a crucial role in loan policies. While applying for a loan, you may see the bank won’t give the full amount, the same as the purchase value, to maintain LSR. If you have recently encountered this word or want to learn it better before applying for a loan, stick to the end of the article.
What is LSR in Loan?
LSR or loan-to-security ratio has two main components. The loan amount you apply for and the actual value (or price) of the asset you are purchasing. This is presented as a percentage value. For example, if the maximum loan amount for a car is 8 lakhs and the actual price of that car is 10 lakhs, then the LSR value is 80%.
Another term is associated with LSR. It is called margin. It’s defined as the remaining amount contributed by the loan applicant or the customer. As per the last example, the margin amount is 2 lakhs which the purchaser needs to pay out of his pocket. It can also be referred to as a downpayment. You need to arrange this amount with your own sources like savings or the selling value of some other asset.
Why is LSR used for Loans?
This ratio is mainly used by the lender (or financial institutes) to evaluate the risk of granting a loan to a borrower. Based on the value of the property being purchased, the LTV ratio is frequently used in mortgage lending.
Also, when a borrower requests loan amounts that are nearly equivalent to the appraised value, it raises the loan-to-security ratio. As a result of the lack of equity in the property, lenders believe there is a higher risk of default. If the lender needs to settle the loan, it may have problems selling the collateral to cover the outstanding mortgage balance while making a profit on the transaction.
Generally for home, car, or gold loans the bank sanctions up to 80% LSR. For project financing for any company, the same loan ratio is referred to as LTC. However, in some cases, it might go up to 90%.
Which is better- higher LSR or lower LSR?
Typically, the higher the LSR value, the higher the risk to the lender. So, if the loan is approved with a higher LSR, the loan generally costs the borrower more to borrow. Also, if the asset value decreases later, it’s harder to cover the loan amount by selling it as well. That’s why, in some particular cases, the bank charges more than usual interest based on the customer profile.
On the other hand, a lower LSR protects the bank against devaluation risk or default risks. So, banks are safe even if the asset value decreases in future.
As a customer, if you want to get a higher LSR, your credit score needs to be good (750+), a lesser loan amount (according to RBI, for less than 35 lakh rupees, one can get up to 90% LSR), low debt concerning your income, and young age.
Conclusion
While LSR is not the only factor to consider while applying for any kind of loan, it’s definitely one of the most important ones. All the related terms with the loan-to-security ratio are mentioned and explained in this article. You’ll get a clear idea of LSR and whether to go with a lower or higher LSR for your loan.