How Crypto LTV Works
A detailed explanation of Loan-to-Value ratios, and how it's applied to crypto loans.
A crypto lending platform is a bank that lets people get loans backed by cryptocurrencies. Many of these platforms operate like companies that provide personal loans to borrowers.
Most crypto lenders offer crypto loans, but they also offer their users attractive ways to invest, like interest accounts and crypto savings accounts. These investment opportunities allow users to earn interest on a wide range of crypto assets.
Most crypto lending platforms offer crypto loans without running credit checks or looking at borrowers' credit histories. This is different from personal loans and traditional loans offered by banks. Due to this factor, crypto traders and investors have been able to get instant personal loans.
Even though most platforms for crypto lending make it easy to get a loan, borrowers must have collateral in order to get a crypto loan. Additionally, these platforms consider the LTV ratio before issuing loans to their users.
An explanation of the term "loan-to-value ratio" will be provided in this article. We will also talk about how the LTV ratio is used in the crypto lending industry right now. Finally, we will reveal some top-rated crypto lenders' loan-to-value ratios. To begin with, let us briefly define crypto loans.
What Are Crypto Loans?
A crypto loan can be classified as a secured loan since it requires users to deposit their crypto assets as collateral before they can secure financing. Other forms of secured loans include car loans and mortgage loans.
To get a crypto loan, a borrower must first offer a crypto asset as collateral to a lender. If the borrower fails to pay the loan at the due date, the crypto lender liquidates the collateral to repay the loan.
Most lenders within the crypto industry offer low annual percentage rates to their users. These crypto lenders include platforms like Nexo and YouHodler.
In terms of their loan offerings, platforms like YouHodler provide high minimum loans to users. YouHodler's crypto loans start at 0% APR for its one-year loan offerings.
What Is A Loan To Value (LTV) Ratio?
The term "LTV," also called "loan-to-value," is a financial expression used to state the collateral value of a borrower's crypto assets compared to the loan amount they wish to secure. Another way to think of this term is as the ratio of the loan amount to the value of the collateral.
Before giving out loans or mortgages, traditional financial institutions use LTV to figure out how risky it is to lend money. In general, these assessments help determine what qualifies as high-risk and low-risk loans.
Loans with high LTV ratios fall under the category of "high-risk loans." On the other hand, low-risk loans have low LTV ratios. The interest rate on loans with high LTV ratios is often higher. Loans with low LTV ratios have low interest rates and a high chance of being approved.
Traditional lenders like banks also use third-party financial platforms to check each borrower's credit history. This is in addition to relying on LTV's assessments. These organizations help determine each user's credit score through financial agencies that hold information on users' credit histories.
This procedure helps financial institutions evaluate the creditworthiness of every potential borrower. An individual with a higher credit score represents a lower risk to the lender.
Most crypto lending platforms do not carry out background checks on their users. So, before giving a crypto-secured loan to a borrower, these platforms give the loan-to-value ratio a lot of thought.
Applying Loan To Value Ratio To Crypto Loans
Most crypto lending platforms do not carry out credit checks on their users. Instead, these loan companies require crypto assets to be put up as collateral in order to get crypto loans. Also, these platforms use the loan-to-value ratio to figure out how risky it is to lend money to someone.
Lenders use a simple mathematical formula to determine the LTV for a crypto loan. This is written as a percentage of the loan amount divided by the value of the collateral. Mathematically, it is expressed like this:
(Loan amount/Value of collateral) * 100%
Loan amount: 6.000 USD;
Value of collateral: 12.000 USD;
Loan-to-Value = ($6.000/$12.000)*100% = 50.0%
In this instance, the LTV of this loan is 50%.
Loan-to-Value And The Volatility Of Crypto Assets
Except for stablecoins, most cryptocurrencies like Bitcoin, Ether, Litecoin, Solana, Dogecoin, and Bitcoin Cash are volatile. So, when there is a big drop in the value of digital assets on the crypto markets, borrowers need to pay close attention to the value of their collateral.
Usually, when there is a price drop, the value of crypto deposits used as collateral reduces. When this happens, the LTV of a loan that uses a crypto asset that goes up and down in value as collateral goes up. So, borrowers must keep an eye on their accounts during this time to keep their collateral from being sold.
Before the margin call, crypto lending platforms like Nexo will send SMS and email alerts to borrowers telling them to pay back their loan or add more crypto assets as collateral. This is being done to keep crypto loans from being liquidated because the crypto markets are going down.
If borrowers don't pay back their existing loans or add crypto assets to their existing collateral, the crypto lending platform will sell the collateralized asset to pay back the loan. Some crypto lenders, like Binance loans, also charge a 2% fee of your original loan amount in the event of a forced liquidation.
Changing your LTV is the best way to lower your chances of being forced to sell, especially when prices change a lot. Because of this, we suggest that you keep a close eye on your LTV and make changes when the price of digital assets on the crypto markets goes down.
Loan-To-Value Ratio For Popular Crypto Lending Platforms
Several crypto loan companies offer reasonable LTV ratios on their loan offerings. This section will reveal the LTV ratios of some of these platforms. Nexo offers an LTV ratio of 15% to 90% on its crypto loans. The lowest LTV available is attached to the NEXO token. In contrast, the highest LTV ratios are attached to stablecoins like USDT, TUSD, DAI, TUSD, and USDP.
Borrowers who want crypto loans should pay close attention to the loan-to-value ratio of their preferred crypto lenders. Loans with high LTV ratios fall under the category of high-risk loans. On the other hand, low-risk loans have low LTV ratios.
If the cryptocurrency markets crash, choosing the right LTV ratio for your crypto loan can help protect the collateral assets of borrowers. But borrowers are told to keep a close eye on their LTV and make changes when the price of digital assets on the crypto markets goes down.
It is also advised to seek the services of a certified financial planner, as their experience can be key to helping users understand this fundamental concept before venturing into the world of crypto lending.