Collateral valuation for lending is the process by which a lender establishes the value of an asset offered as security for a loan. The asset may be a home or commercial building, land, vehicles, plant and equipment, inventory, receivables or financial assets. The lender uses the figure to decide how much to lend, usually by setting a maximum loan-to-value ratio (LTV), and to estimate what it could recover if the borrower defaulted.
Property is normally valued by an independent professional, who produces an appraisal report based on comparable sales, income or replacement cost. Valuations are carried out during credit underwriting and refreshed over the life of the loan, with statistical models used to monitor large residential portfolios. Bank capital rules set conditions on valuation before collateral counts as credit risk mitigation. The daily, haircut-based approach used for securities is described under collateral valuation.