Loan-to-Value (LTV) Ratio: Assessing Your Risk in Crypto Loans
The flexibility and convenience of cryptocurrency make it an ideal way to provide people with loans. If you're considering working with crypto loans, it's important to understand how loan-to-value (LTV) ratios work. This useful metric is a great way to determine whether or not a loan is risky. Explore this guide to learn more about LTV ratios and the mechanics behind them.
Key Takeaways:
A crypto loan is any type in which an individual borrows cryptocurrency tokens from a lender in exchange for collateral, which is forfeited if the borrower doesn’t pay back the loan within a certain amount of time.
Crypto loan-to-value (LTV) ratio is a helpful metric for assessing risk during a loan. It compares the value of the borrower’s collateral to the value of the loan.
A high LTV ratio means the loan is riskier for the lender, so the interest rate will be higher. A low LTV ratio means the risk is lower, so the borrower doesn't have to pay as much in interest.
What Are Crypto Loans?
Crypto loans are any type of loans in which a person borrows cryptocurrency tokens from a lender. Lenders typically require borrowers to stake some sort of asset as collateral for a loan. A borrower will forfeit the collateral if they don’t pay back the loan within a certain amount of time.