Loan-to-value (LTV) is a term used in the cryptocurrency world to describe the ratio of loan amount to the value of an asset that is being purchased with a loan. It is typically expressed as a percentage and calculated by dividing the loan amount by the value of the asset or collateral securing it. The higher this ratio, the greater risk taken on by lenders, who may require additional security or increase their interest rate accordingly.
The LTV ratio has become increasingly important in cryptocurrency due to its volatility and decentralized nature. As cryptocurrencies are not regulated like traditional currencies, there are no established regulatory standards for determining LTV ratios; each lender will have their own process for calculating this figure depending on factors such as borrower creditworthiness and desired collateral type.
In general, however, most lenders will only accept loans up to 80% of an asset’s purchase price when using digital currency as collateral – meaning borrowers must provide 20% upfront cash payment out-of-pocket before they can secure financing from any given lender. This requirement helps protect lenders against default risk while giving borrowers access to more affordable financing options than they would find elsewhere without requiring them to tie up significant amounts of capital in one transaction.
It’s important for crypto users considering taking out a loan with digital currency as collateral understand how Loan–to–Value works so they know what kind of deposit or other requirements might be necessary before applying for financing — and how much leverage it could offer them if approved for funding at all stages throughout repayment period. Understanding these basics about LTV ratios can help ensure you get better terms on your next crypto loan!
