Used by lenders, loan-to-value (LTV) is the assessment ratio of risk involved while approving a loan. Simply, it is the ratio of the loan’s value to the value of the collateral.
What Is Loan-to-value (LTV)?
Loan to value (LTV) determines the amount of cryptocurrency one would need as collateral before one could get a loan. The lender holds on to this collateral until the loan is fully paid back.
The main benefit of LTV in crypto lending is that it helps minimize the risk on the lender’s part. The user also benefits from LTV in that they can access larger loans at lesser interest rates.
How to Calculate LTV?
Your LTV would be 50% if you borrowed $5,000 and deposited $10,000 worth of bitcoin. However, if the value of bitcoin fell, your collateral’s value would decrease, increasing your ratio. To get your loan back to its original LTV ratio, if your LTV rises too high, you might need to put up extra collateral.
Benefits of Loan-to-Value in Crypto Lending
In traditional collateral-based lending, LTV is a measure of the risk on the investor’s side. The higher the LTV, the higher the lender’s risk and, consequently, the higher the interest rate for the borrower. In crypto-backed loans, the LTV ensures full repayment in time, thus reducing the investor’s risks. If the borrower fails to pay back their loan for whatever reason, part of the collateral is sold to offset the loan.