How Crypto LTV Works
A crypto lending platform is a financial institution that offers users access to crypto-backed loans. Many of these platforms operate like companies that provide personal loans to borrowers.
In addition to offering crypto loans, most crypto lenders also provide attractive investment opportunities to their users, like interest accounts and crypto savings accounts. These investment opportunities allow users earn interest on a wide range of crypto assets.
Unlike personal loans and traditional loans offered by financial institutions, most crypto lending platforms offer crypto loans without carrying credit checks or viewing borrowers' credit history. Due to this factor, crypto traders and investors have been able to get instant personal loans.
Although most crypto lending platforms offer easy access to loans, borrowers must provide collateral to qualify before accessing 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. Additionally, we will consider how the LTV ratio is being applied today in the crypto lending industry. Finally, we will reveal some top-rated crypto lenders' loan-to-value ratios. To begin, 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.
Borrowers must first offer a crypto asset as collateral to a lender to secure a crypto loan. 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 BlockFi, Celsius, Nexo, and CoinLoan.
In terms of their loan offerings, platforms like BlockFi and Celsius provide high minimum loans to users. BlockFi's crypto loans start at 4.5% APR for its one-year loan offerings. However, its minimum loan amount is fixed at $10,000.
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. Alternatively, the term can also be described as the ratio of a loan to the collateral value.
In the traditional financial setting, monetary organizations use LTV to assess lending risk before approving loans or mortgages. In general, these assessments help to determine what qualifies as high-risk and low-risk loans.
Loans with high LTV ratios fall under high-risk loans. On the other hand, low-risk loans are a product of 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.
Apart from relying on assessments provided by LTV, traditional lenders like banks also check each borrower's credit history using third-party financial platforms. These organizations help determine each user's credit score with financial agencies that hold information on users' credit history.
This procedure helps financial institutions to 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. As a result, these platforms give serious consideration to the Loan To Value Ratio before issuing a crypto secured loan to a borrower.
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 pledged as collateral for accessing crypto loans. Additionally, these platforms use the Loan-To-Value ratio to measure the lending risk of potential borrowers.
Lenders use a simple mathematical formula to determine the LTV for a crypto loan. This formula is expressed as the loan amount divided by the collateral value, expressed as a percentage. 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. As a result, borrowers must pay keen attention to the value of their collateral when there is a significant drop in the value of digital assets in the crypto markets.
Usually, when there is a price drop, the value of crypto deposits used as collateral reduces. In such cases, the LTV of a loan using a volatile crypto asset as collateral increases. As a result, borrowers must monitor their accounts during this period to prevent the liquidation of their collateral.
Crypto lending platforms like Nexo will automatically send alerts via SMS and email, instructing borrowers to repay their loan or add more collateral to their existing crypto assets before it hits margin call. This move is deployed to prevent the liquidation of existing crypto loans due to a downtrend in the crypto markets.
If borrowers fail to repay their existing loans or add crypto assets to their existing collateral, the crypto lending platform will sell off the collateralized asset to repay 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.
Adjusting your LTV is the best way to mitigate the chances of being liquidated, especially during extreme price movements. For this reason, we recommend closely monitoring your LTV regularly and adjusting when there are dips in the price of digital assets in the crypto markets.
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.
CoinLoan provides an LTV ratio of 20% to 70% on all its crypto loans. This platform encourages its users to pick low LTV ratios to prevent the liquidation of collateral in case of a market fall.
Celsius LTV ratios fall within 25%-70% for its crypto-backed loans. This platform only offers stablecoins like USDT, TUSD, GUSD, and USDC as crypto loans to its users. However, borrowers can deposit a wide range of cryptocurrencies as collateral for their loans.
Borrowers seeking crypto loans must give special consideration to their preferred crypto lenders' Loan To Value ratio. Loans with high LTV ratios fall under high-risk loans. On the other hand, low-risk loans are a product of low LTV ratios.
Selecting the correct LTV ratio for your crypto loan can help protect borrowers' collateral assets in case of a crash in the crypto markets. However, borrowers are encouraged to closely monitor their LTV regularly and adjust when there are dips in the price of digital assets in the crypto markets.
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.