How to Calculate Your APR on Crypto-backed Loans: Tools and Tips for Smart Borrowing

Maximize your crypto borrowing power: Learn how APR impacts your loans, how to calculate it, and avoid hidden fees for smarter financial moves.

Calculate Your APR on Crypto-backed Loans and avoid hidden fees

By Prince Jindal, Co-Founder of Lantern.Finance

16 Dec 2024

APR stands for Annual Percentage Rate. It is the yearly cost of borrowing money, expressed as a percentage. For crypto loans, the APR includes both the interest rate and any additional fees charged by the lending platform.

Why is APR Important for Crypto-backed Loans?

The APR gives you a clear idea of how much you’ll owe on a loan, allowing you to compare the total cost of borrowing across different platforms. This is crucial because:

  1. Transparency: APR reflects the true cost of the loan beyond just the interest rate.

  2. Comparison: It helps borrowers compare different lenders on a like-for-like basis.

  3. Financial Planning: Knowing your APR helps you calculate your repayment schedule and avoid unexpected costs.

Example:

If you borrow $10,000 in cryptocurrency with a 10% APR, you’ll owe $1,000 in interest (assuming no additional fees and that you repay after one year). If the APR includes a 2% platform fee, your total cost rises to $1,200.

Loan-to-Value (LTV) and Its Impact on APR

  • What is LTV?: LTV = Loan Amount / Collateral Value.

  • How LTV Affects Interest Rates:

    • Lower LTV = Lower risk = Lower APR

    • Higher LTV = Higher risk = Higher APR

Here’s the LTV slab with its corresponding interest rate we follow at Lantern.

Loan to value and interest rate to calculate APR for crypto-backed loans

How to Calculate APR for Crypto-backed Loans?

  1. Determine the Interest Rate: Find the lender's stated annual interest rate. If you borrow cash from Lantern, the interest rate is 10% based on a 35-50% LTV when borrowing against SOL. Here’s a visual representation of calculating APR for a $1000 crypto loan

    Example to show APR calculation for a crypto loan based on interest rate and LTV

  2. Add Fees: Include additional costs (e.g., origination or platform fees). At Lantern, we charge a fixed upfront fee of 2% of value of the loan amount. Let’s say your loan amount is $10,000, the fixed upfront platform fee becomes $200. Here’s an example:

    How changing the crypto collaterl type affects your APR for a crypto loan based on interest rate and LTV

  3. Convert to a Percentage: Calculate the total cost of borrowing as a percentage of the loan amount. Upfront fee in percentage is 2%

For SOL and ETH, based on LTV slab, interest rate is 10% Therefore the APR for a $10,000 crypto loan is the sum of the upfront fee and interest rate = 12%

How changing the crypto collaterl type affects your APR for a crypto loan based on interest rate and LTV

Try out our Online APR Calculator: Input loan amount, interest rate, and fees to get an instant calculation. But if your collateral is something other than ETH or SOL? Should I do it for BTC as well?

Why Does APR Matter to You as a Borrower?

Understanding and calculating APR is critical for smart borrowing, especially in the crypto space where market volatility and platform terms can directly impact your finances. Here’s how it empowers you:

Identifying the Most Cost-Effective Crypto Loan Options

  • APR Reflects the True Cost: Platforms may promote loans based on low interest rates, but hidden fees like origination fees, platform charges, or compounding interest can drive up costs. APR combines all these factors to give you a complete picture of the real borrowing cost.

  • Example:

    • Platform A offers a 9% annual interest rate with a 2% upfront fee.

    • Platform B offers a 10% interest rate but no fees.

    • Using APR calculation, you can clearly see that Platform A’s total APR is 11% even though the interest rate is lesser, while Platform B’s APR remains 10%, making it cheaper for you.

By comparing platforms based on APR, you avoid being misled by headline rates and ensure you get the best deal.

Identifying the Most Profitable Crypto Loan Collateral Options

  • Different collateral types (e.g., BTC, ETH, SOL) come with varying APRs due to loan-to-value (LTV) ratios and interest tiers.

  • Why It Matters:

    • Stable assets like BTC may attract lower interest rates due to their reduced volatility, while assets like SOL may have higher interest due to greater price swings.

    • Borrowing against assets with the lowest APR allows you to retain more of your investment capital and reduce repayment stress.

  • Example:

    • If you borrow $10,000 against BTC with a 10% APR and against SOL with a 12% APR, you save $200/year in interest by choosing BTC as collateral.

Being mindful of the APR based on your collateral can optimize costs while maximizing your crypto holdings.

Avoid Loans with Hidden Fees or Unfavorable Terms

  • APR includes all fees, making it the most transparent metric for borrowers. Some platforms might charge:

    • Origination Fees: Upfront costs added when you take the loan (e.g., 2% of loan value).

    • Withdrawal Fees: Costs to access your loaned amount.

    • Liquidation Fees: Penalties if your collateral value drops below a threshold.

  • Why It Matters:

    • Without APR clarity, borrowers may unknowingly take on loans that appear cheap but carry expensive hidden fees.

    • Calculating APR ensures you avoid predatory loan terms and hidden surprises.

  • Tip: Always compare effective APR across platforms to ensure you’re accounting for all costs. Lantern only charges origination fees and no other hidden fees.

Maximizing Your Profits and Returns on Borrowed Funds for Crypto Investments

  • Borrowing crypto is often done to invest in higher-return opportunities (e.g., trading, staking, or yield farming). A lower APR allows you to:

    • Minimize Borrowing Costs: The less you spend on repayments, the more profit you retain.

    • Improve Your ROI (Return on Investment): Higher net returns are achievable when borrowing costs remain low.

  • Example:

    • If you borrow $10,000 at a 10% APR and invest in a staking protocol yielding 15% annually, your net profit is:

      • Gross Return: $1,500/year

      • Loan Cost (APR): $1,000/year

      • Net Profit: $500/year

    • However, if the APR were 12%, your loan cost increases to $1,200/year, reducing your profit to $300.

By choosing loans with a low APR, you enhance your ability to capitalize on investment opportunities and grow your crypto portfolio faster.

Conclusion: Benefits of knowing APR

APR empowers borrowers to:

  • Save money by identifying the cheapest loan options.

  • Optimize collateral choices for the most favorable terms.

  • Avoid surprises like hidden fees or penalties.

  • Grow wealth strategically by minimizing borrowing costs and increasing investment returns.

Understanding APR isn’t just about saving money—it’s about taking control of your borrowing strategy to maximize your financial potential in the crypto market.

Would you like to see a live calculation of APR for your crypto? Get in touch with us now.

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