Legal Definitions - loan value

Loan value refers to the maximum amount of money that can be safely borrowed against a specific asset, such as real estate, equipment, or a life insurance policy. This amount is determined to protect the lender from potential financial loss if the borrower defaults on the loan. It can also specifically refer to the amount an individual can borrow against the accumulated cash value of their own life insurance policy.

• Example 1 (Real Estate Mortgage)

  A couple wants to purchase a new home with a market value of $500,000. When they apply for a mortgage, their bank assesses the property and determines its "loan value" to be $400,000. This means the bank is willing to lend them a maximum of $400,000, requiring the couple to provide a $100,000 down payment.

  This illustrates loan value from a lender's perspective. The bank sets the loan value at $400,000 to ensure that, even if the housing market experiences a downturn or the couple defaults, selling the house for $400,000 (or more) would likely cover the outstanding loan amount, thereby protecting the bank's investment.

• Example 2 (Life Insurance Policy Loan)

  Maria has a whole life insurance policy that she has maintained for 20 years, accumulating a significant cash value of $75,000. She needs funds for an unexpected medical expense and decides to borrow against her policy. Her insurance company informs her that the policy's "loan value" is $65,000.

  Here, the $65,000 represents the maximum amount Maria can borrow directly from her insurance policy, using the accumulated cash value as collateral. The insurance company typically sets the loan value slightly below the full cash value to maintain a margin for administrative costs and potential interest accrual, ensuring the policy remains solvent.

• Example 3 (Business Equipment Financing)

  A construction company seeks a loan to purchase new heavy machinery, offering its existing fleet of excavators and bulldozers as collateral. The current market value of the existing fleet is estimated at $800,000. However, the lender, after considering factors like depreciation, specialized nature, and potential resale market for used equipment, determines the "loan value" of the fleet to be $550,000.

  This example shows how a lender calculates loan value for business assets. Despite the higher market value, the lender sets the loan value at $550,000. This lower figure reflects the amount they believe they could realistically recover by selling the equipment if the company defaults, accounting for the challenges and costs associated with liquidating specialized, depreciating assets.