Loss Given Default (LGD) Calculator
Calculate Loss Given Default — the net amount a lender loses when a borrower defaults, expressed as a percentage of the exposure at default (EAD). LGD is a core input to credit risk models.
How to use this tool
- Enter exposure at default (ead), amount recovered and recovery costs in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your lgd (%) and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
LGD (%) = (EAD − Net Recovery) / EAD × 100
where Net Recovery = Amount Recovered − Recovery Costs
Equivalently: LGD = 1 − Recovery Rate
How it works
Loss Given Default measures the fraction of an exposure that is permanently lost when a counterparty defaults, after accounting for any amounts recovered through collateral liquidation, guarantees, or bankruptcy proceedings net of recovery costs.
LGD is a key parameter in Basel II/III credit risk frameworks and feeds directly into the Expected Loss formula: EL = PD × LGD × EAD, where PD is the probability of default.
Worked example
Corporate Loan Default
- Exposure at default (EAD): $100,000
- Amount recovered from collateral: $40,000
- Recovery costs (legal, admin): $5,000
- Net recovery = $40,000 − $5,000 = $35,000
- LGD = ($100,000 − $35,000) / $100,000 = 65%
LGD = 65%, meaning the lender loses $65,000 on the $100,000 exposure.
Common mistakes to avoid
- Forgetting to deduct recovery costs (legal fees, collection expenses) from gross recovery before computing LGD — gross recovery overstates what the lender actually keeps.
- Confusing LGD with PD (probability of default): LGD tells you how much is lost if default occurs; PD tells you how likely default is. Expected loss = PD x LGD x EAD, not just LGD alone.
- Applying a portfolio-average LGD to a specific collateralized loan without adjusting for collateral type and seniority — secured senior debt typically has LGD of 20-40%, while unsecured subordinated debt can exceed 80%.
Key terms
- What is Loss Given Default?
- LGD is the percentage of a loan or credit exposure that a lender loses permanently when a borrower defaults, after recovering what it can from collateral or the bankruptcy process.
- What is the Recovery Rate?
- Recovery Rate = 1 − LGD. It is the fraction of the exposure a lender successfully recovers after default. LGD + Recovery Rate always sum to 100%.
- How is LGD used in Basel capital requirements?
- Under the Basel Internal Ratings-Based (IRB) approach, banks estimate LGD (along with PD and EAD) to calculate risk-weighted assets and minimum regulatory capital.
- What factors affect LGD?
- Seniority of the debt, collateral quality and coverage, industry, economic cycle, jurisdiction's insolvency laws, and time to resolution all influence LGD.
Frequently asked questions
- What is a typical LGD for an unsecured consumer loan?
- Unsecured consumer loans (credit cards, personal loans) typically have LGDs in the range of 60-90% because there is no collateral to recover against, and collection costs consume a significant portion of any recovery.
- How does collateral reduce LGD?
- Collateral provides a recoverable asset that the lender can seize and liquidate upon default. A mortgage, for example, is backed by real property; even after foreclosure costs, lenders typically recover 60-80% of outstanding balances, yielding an LGD of 20-40%.
- Is LGD the same as loss severity?
- Yes, the terms are used interchangeably in credit risk. Both express the fraction of exposure that is lost after accounting for all recoveries and recovery costs.