How do crypto loans work?

Every crypto loan runs through the same four steps, whether it originates on a centralized exchange or a DeFi protocol.

That includes Kraken Borrow, which builds these same steps into the normal buy flow, so the crypto you already hold becomes buying power to access more without selling.

If you are still learning about the underlying concept of crypto loans, and want more detail before getting into the mechanics, our overview covers what crypto loans are and what role they might play in your investing strategy.

You lock crypto you own as collateral. On a custodial platform, the company takes possession of it for the life of the loan. On a DeFi protocol, a smart contract holds it instead. Either way, you no longer have free use of the collateral that backs the loan until the loan is closed.

Once collateral is posted, you can borrow up to a set fraction of its value. That fraction is capped by your loan-to-value limit and reduced by a “haircut” on volatile assets (both explained in the next section). Borrow less than the maximum and you leave yourself a buffer. Borrow the maximum and you might sit one price dip away from trouble.

You can then use what you borrowed. On many platforms that means receiving cash or stablecoins to spend elsewhere. On Kraken, loans are directly connected to your buying power, as the borrowed amount is folded into a single buy flow so you can buy more crypto without a separate loan step.

You repay the borrowed amount plus accrued interest, in full at once or in parts over time. Each repayment lowers what you owe and improves your loan health. Once the loan balance is repaid, your collateral is released back to you.

Loan-to-value, or LTV, is the engine of a crypto loan, and it is the one number you should watch most carefully. LTV is your loan amount divided by the value of your collateral, written as a percentage.

A lower LTV means a bigger safety buffer before anything goes wrong.

Borrow $4,000 in stablecoins against $10,000 of collateral and your starting LTV is 40%. The catch is that LTV is not fixed. Your loan amount stays the same, but your collateral’s value moves with the market, so your LTV rises the moment your collateral falls in price.

That single relationship is the source of almost every crypto-loan risk.

A haircut is a discount applied to an asset’s market value. It determines how much a platform will actually lend against that asset, leaving room for market volatility.

A less volatile asset might get a small haircut, while a more volatile one gets a larger haircut and therefore supports a smaller loan. Bitcoin, for example, typically carries a smaller haircut than a thinly traded altcoin. Asset-specific detail lives in our guide to borrowing against Bitcoin.

Interest is the cost of borrowing, and it is charged only on the amount you actually owe. Understanding how it accrues and how you clear it is what separates a cheap, well-managed loan from an expensive one.

Interest builds up on your outstanding balance over time, often calculated in small increments rather than once a month.

Rates may be fixed or variable. A fixed rate stays locked in, while a variable rate can rise and increase your cost of carrying the loan. The larger your balance and the longer you hold it, the more interest you pay, so repaying sooner costs less.

On a fixed-term loan you repay by a set date. On an open-ended loan there is no maturity date, so you repay whenever it suits you, partially or in full.

Some platforms also let you repay by selling a portion of your collateral. Kraken Borrow’s open-ended loans let you repay any time with no early-repayment fee, based on the exact terms shown to you before you confirm your purchase.

In the event that you cannot, or simply choose not to, repay right away on an open-ended loan, nothing dramatic happens as long as your collateral holds its value. The pressure comes entirely from the collateral side: if its value falls far enough, the loan can be liquidated, which is exactly what the next section covers.

Liquidation is the mechanism that protects the lender, and it is the single event a borrower most needs to avoid. When your collateral falls far enough that the loan is at risk, the platform sells some of that collateral automatically to bring the loan back into balance.

This is not a punishment. It is the system doing exactly what it was designed to do, and it can happen at any time. That is why it is worth understanding the mechanics behind a liquidation event, so you can take steps to reduce your risk.

Before liquidation, most platforms issue a margin call, a warning that your loan health has deteriorated and you need to act. You can respond by adding collateral (which lowers your LTV) or repaying part of the loan (which does the same). A margin call is a chance to fix the problem before the platform fixes it for you.

If you do not act and your collateral keeps falling, the platform reaches its liquidation threshold and sells enough collateral to cover the loan. You keep whatever is left, but you have now sold the very asset you were trying to hold onto, often at a low price. On Kraken specifically, loan health is tracked with a loan-to-margin ratio (LMR): a margin call is triggered at 80% LMR, and liquidation begins if it falls to 40% LMR.

Avoiding liquidation is mostly about discipline before you borrow, not heroics after. Borrow well below your maximum LTV, keep spare collateral you can add quickly, and monitor your loan health rather than setting and forgetting it. The same conservative habits apply whether you borrow on an exchange or a DeFi protocol, and our DeFi safety guide covers the non-custodial specifics.

Kraken runs this whole process inside the normal buy flow instead of as a separate lending product. You see one buying-power figure, your cash is spent first, and a crypto-backed loan covers the gap only if you need it, with the rate and fees shown before you confirm. Robinhood popularized this single buying-power number for stocks, and our comparison looks at how each platform handles it.

Situation. A newer investor holds $10,000 of Bitcoin and wants to buy more without selling. The platform lets him borrow up to $5,000 in stablecoins against it, so he borrows the full $5,000 worth of collateral, putting his starting LTV near the maximum.

Approach. He treats the maximum as a target rather than a ceiling, leaving almost no buffer. He does not set aside spare collateral or check his loan health after the first day.

Outcome. Bitcoin dips 20% over a week. Because he started at the top of his limit, that ordinary move pushes his LTV into margin-call territory, and he has to scramble to add collateral to avoid liquidation.

Lesson. The maximum LTV is where risk lives, not where you should sit. Borrowing at half his limit would have absorbed the same 20% drop without a margin call. Discipline before you borrow beats damage control after.

You now understand the full loop: collateral in, borrow against your LTV, pay interest, repay to unlock, and stay clear of the liquidation threshold.

On Kraken, that entire process is built into the buy flow, so eligible crypto you already hold becomes buying power, your cash is spent first, and the rate and fees appear before you confirm. It runs on the same infrastructure behind Kraken Pro, whose managed custodial wallets have never been breached since 2011, and it sits in one account alongside trading, staking, and the rest, so there is nowhere else you need to go to put it to work.