What Do APR, LTV, and Liquidation Mean?
These are the three terms you'll see again and again with crypto-backed loans.
APR (Annual Percentage Rate) tells users how much interest the loan carries over a year. Interest accumulates while the loan remains active, so the amount required for repayment will be higher than the amount originally borrowed.
LTV (Loan-to-Value) shows how large the loan is compared with the collateral.
- $1,000 collateral and 50% LTV = $500 loan
- $1,000 collateral and 70% LTV = $700 loan
- $1,000 collateral and 90% LTV = $900 loan
Basically, a higher LTV lets users borrow more against the same amount of collateral. So, why even bother with 50% LTV then? Because the extra borrowing power comes with extra risk. A higher LTV leaves less room for the collateral price to fall before the loan reaches its liquidation level.
Liquidation happens when the collateral is no longer valuable enough to support the outstanding loan. Let’s go back to our LTV examples.
A user provides $1,000 in crypto and borrows $500. The loan starts at 50% LTV. If the crypto price falls, that collateral is now worth only $700. But the borrowed amount hasn't changed just because the market did. The loan is still $500, but now only $700 worth of collateral supports it. The LTV has therefore increased from 50% to about 71%.
The price down limit (liquidation level) is specified for the particular loan. You’ll see it before confirming. If the collateral keeps falling and the LTV reaches the liquidation level, CoinRabbit will sell the collateral to cover the outstanding debt. Once liquidation happens, you can't simply repay the original loan later and ask for the liquidated crypto back. That's the main risk of borrowing against a volatile asset.
A higher starting LTV means more money can be borrowed against the same collateral, but it also means less room for the collateral price to fall. Always check the liquidation level before confirming a loan.
What Can I Do If My Collateral Price Falls?
A falling price doesn't mean immediate liquidation. It means the value supporting the loan has decreased and the LTV has gone up. Depending on the available loan conditions, users may be able to add more collateral or repay part of the loan to bring the LTV back down.
Keep an eye on the loan status and any notifications about the position, especially during larger market movements. If the LTV is approaching the liquidation level, users need to act before it happens.
- Add more collateral. More collateral lowers the LTV and gives the position more room against further price drops.
- Repay part of the loan. Reducing the outstanding debt also lowers the LTV.
- Repay the loan completely. Once the full amount and accumulated interest are repaid, the remaining collateral can be released.
Liquidation conditions can differ between loans. Always use the LTV and liquidation level displayed for the specific loan rather than relying on a percentage seen elsewhere.