What Is Loan-to-value (LTV)?
Loan-to-value (LTV) is the ratio of a loan’s value to the value of the collateral provided.
In traditional financial markets, credit scores are used to assess loan risk, with lower scores indicating higher risk for lenders.
In crypto lending, asset-backed loans are offered instead of relying on credit scores.
LTV determines the amount of cryptocurrency required as collateral to secure a loan, with the lender holding the collateral until the loan is fully repaid.
An essential benefit of LTV in crypto lending is its ability to minimize risk for lenders.
Users also benefit from LTV by accessing larger loans at lower interest rates.
Benefits of Loan-to-Value in Crypto Lending
In traditional collateral-based lending, LTV serves as a measure of risk for investors.
Higher LTV ratios indicate a higher risk for lenders and, consequently, higher interest rates for borrowers.
LTV ensures timely repayment in crypto-backed loans, reducing the investor’s risk.
If the borrower fails to repay the loan, part of the collateral is sold to offset the debt.
Managing Risk and Collateral
As a borrower, your LTV ratio allows you to assess your own risk.
Depending on the chosen platform, LTV risk can range from 5% to 70%.
A lower LTV provides a safety buffer, protecting your assets from likely liquidation during market downturns.
Conversely, a higher LTV requires quick action in extraordinary market situations, as collateral is more likely to be liquidated to settle the loan.