Crypto-Backed Loan Interest Cost

Simple. Aave, Compound, MakerDAO, Morpho, and virtually every other DeFi lending protocol accrue interest on the outstanding principal balance per second or per block, with no compounding on accrued interest. The formula in this calculator — Interest = Loan × Rate × (Term / 12) — is exactly the simple-interest formula and matches the DeFi accrual model. By contrast, credit cards, traditional mortgages, and most savings accounts use compound interest, where interest accrues on interest. For a $50K loan at 8% for 12 months, simple interest costs $4,000; monthly-compounded interest would cost $4,150. The difference is small at short terms and single-digit rates, but grows substantially for longer terms and higher rates.

LTV (loan-to-value) is the ratio of your loan balance to your collateral value. If you borrow $50K against $100K of ETH, your LTV is 50%. Each protocol sets a maximum LTV — typically 75–80% for stablecoin loans against major crypto — and if the LTV exceeds that threshold due to a collateral price drop, the position is liquidated: the protocol automatically sells your collateral to repay the loan and takes a penalty (usually 5–15% of the collateral) for the trouble. This is why LTV matters more than interest rate: the interest on a $50K loan at 8% for a year is $4,000, but a single liquidation event could cost you $10,000+ in penalty plus the loss of any remaining collateral buffer. The interest is the small, predictable cost; the liquidation risk is the large, unpredictable one.

Liquidation price is the collateral price at which your LTV crosses the protocol's threshold. If you borrow $50K against $100K of collateral and the protocol's max LTV is 80%, then liquidation occurs when the loan balance ($50K plus accrued interest) is 80% of the collateral value — i.e. when collateral falls to $62,500 (assuming no interest accrued yet). That is a 37.5% drop from $100K, so a 1 BTC collateral position at $100,000 would liquidate at $62,500. The formula is: liquidation price = loan balance / max LTV / collateral quantity. As interest accrues, the loan balance grows, so liquidation price rises slowly over time even if collateral price is unchanged. This calculator models this on the LTV card above: input your collateral value and see the current LTV, the liquidation threshold, and the break-even collateral return.

Aave and Compound do not set rates; the market does. Each lending pool has a supply side (lenders depositing USDC) and a borrow side (borrowers taking USDC out). The borrow rate is set by a utilization curve — the fraction of the pool that has been borrowed. At low utilization, rates are low (1–3%) to encourage borrowing. As utilization rises, rates rise sharply (up to 10–20% or more) to encourage repayment and attract more supply. This means the rate you borrow at today is not the rate you will pay tomorrow. A rate of 3% can become 8% in a week if utilization spikes. Sophisticated borrowers monitor their positions constantly, or use fixed-rate alternatives like Maple, Goldfinch, or Notional to lock in a rate for the term.

Several. Origination fees (0.1–0.5% on most DeFi protocols, up to 2% on CeFi lending desks), gas costs to open the loan and to repay it (which can be $10–$200 on Ethereum mainnet depending on congestion, and near-zero on L2s), and liquidation penalties (5–15% of collateral, applied only if the position is liquidated) all sit on top of the interest. On small loans, gas alone can rival or exceed the interest cost — a $1,000 loan with $50 in gas on both ends has effectively 10% in fees before a single day of interest accrues. Always size the loan so the fees are a small fraction of the principal. This calculator handles interest only; add fees and gas separately for the true all-in cost.

It depends on three things: the interest cost, the tax you would owe on a sale, and your conviction in the collateral. If you would owe 20% long-term capital gains on a $50K sale ($10K in tax), then paying $4K in interest for a 12-month loan is cheaper by $6K — the loan wins on pure cost. But the loan adds liquidation risk that a sale does not have: if the collateral falls 40% during the term, you may be forced out of the position entirely. So the loan makes sense if (a) the interest rate is below your tax rate, (b) you have high conviction the collateral will not crash, and (c) you are comfortable monitoring the LTV. If any of those three is not true, selling may be the cleaner path — especially with the ability to re-buy and reset the cost basis.