Dear Hilary – Loss Given Default
February 2017
Dear Hilary,

I am looking at the loan detail for a specific loan, and I am wondering what loss given default is? How is the loss given default calculated for loans that don’t have collateral?

Sincerely,
At a Loss

 

Dear At a Loss,

Fantastic question! Loss Given Default (LGD) is the loss a lender incurs should a borrower default on a loan, and it is different for loans that are secured by collateral and loans that do not have collateral and are considered unsecured.
For collateralized (secured) loans, the LGD is equivalent to the loan balance less the collateral value multiplied by a collateral value recovery rate.

A collateral value recovery rate is used to account for expenses such as selling costs, legal fees, agent fees, etc. For unsecured loans, the LGD is equivalent to the outstanding balance of the loan. Loss Given Default is also referred to as Exposure and Negative Equity.

Happy Friday!
Hilary

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