Loss Given Default (LGD) Calculator
Analysis Results
What Is Loss Given Default (LGD)?
Loss Given Default (LGD) is the percentage of a loan that a lender expects to lose if the borrower fails to repay.
In simple terms:
- The borrower defaults
- The lender sells collateral (if any)
- Costs are deducted
- Whatever is not recovered becomes the loss
LGD focuses on severity of loss, not the chance of default. That makes it different from Probability of Default (PD), which measures how likely default is.
Why LGD Matters in Lending and Risk Management
LGD plays a key role in credit decisions and regulatory models. It is used by:
- Banks pricing loans
- Credit analysts evaluating risk
- Risk teams calculating expected loss
- Institutions following Basel capital rules
A small change in LGD can significantly affect profitability and capital requirements. That is why accurate LGD estimates matter.
How the Loss Given Default Calculator Works
This calculator follows a clear, logical flow that mirrors how lenders think about recovery after default.
Step 1: Exposure at Default (EAD)
EAD is the total amount owed when the borrower defaults.
Example:
If a borrower owes $500,000 at default, EAD is $500,000.
This is the base number used in all LGD calculations.
Step 2: Collateral Market Value
This is the current market value of pledged assets, such as:
- Real estate
- Equipment
- Vehicles
- Cash or securities
Important note: this is not the purchase price. It is what the asset could reasonably sell for today.
Step 3: Apply the Liquidation Haircut
Collateral is rarely sold at full market value during a forced sale.
The liquidation haircut reflects this discount.
Examples:
- Cash: 0% haircut
- Residential real estate: 20–30%
- Equipment: 40–60%
The calculator reduces collateral value using this percentage to estimate realistic sale proceeds.
Step 4: Deduct Workout and Legal Costs
Recovering collateral costs money. These expenses reduce what the lender actually receives.
Common costs include:
- Legal fees
- Court filings
- Auction fees
- Asset management and admin costs
The calculator subtracts these costs after applying the haircut.
Step 5: Cap Recovery at the Loan Balance
A lender cannot recover more than what is owed.
If collateral proceeds exceed EAD, the excess belongs to the borrower, not the lender. The calculator automatically applies this cap.
The LGD Formula Explained Simply
The calculator uses this formula:
LGD = 1 − (Net Recovery ÷ EAD)
Where:
- Net Recovery = Liquidated collateral value − costs
- EAD = Exposure at Default
The result is shown as a percentage.
What the Calculator Outputs Mean
The tool provides four key results. Each one tells a different part of the story.
1. LGD Percentage
This is the headline number.
- 0% LGD means no expected loss
- 45% LGD means losing nearly half the exposure
- 75%+ LGD suggests severe risk
Lower is always better from a lender’s perspective.
2. Net Economic Loss (Dollar Value)
This shows the actual money lost, not just a percentage.
Example:
- EAD: $1,000,000
- Recovery: $650,000
- Loss: $350,000
This number is critical for financial planning and stress testing.
3. Projected Recovery Rate
This is the opposite of LGD.
Recovery Rate = 100% − LGD
It shows how much of the loan is expected to be recovered after default.
4. Risk Classification
The calculator assigns a risk label based on LGD severity:
- Fully Secured: Zero expected loss
- Low Severity: Strong collateral coverage
- Standard Severity: Typical secured lending risk
- High Severity: Weak or unsecured exposure
- Critical Loss: Near total write-off
These labels help non-technical users quickly understand the result.
Example LGD Calculation (Realistic Scenario)
Let’s walk through a simple example.
- EAD: $400,000
- Collateral value: $300,000
- Haircut: 25%
- Legal costs: $20,000
Steps:
- Liquidated collateral = $300,000 × 0.75 = $225,000
- Net recovery = $225,000 − $20,000 = $205,000
- Loss = $400,000 − $205,000 = $195,000
- LGD = 48.75%
This would fall into the high severity category.
Who Should Use an LGD Calculator?
This calculator is useful for:
- Credit analysts
- Commercial lenders
- Risk managers
- Finance students
- Loan portfolio managers
It works especially well for secured lending scenarios where collateral and recovery costs matter.
Limitations to Keep in Mind
While powerful, this calculator makes a few assumptions:
- Haircuts are fixed percentages
- Time value of money is not modeled
- Recovery timing is not discounted
- Market volatility is not simulated
For advanced modeling, LGD is often combined with PD and EAD in expected loss frameworks.