Understanding Crypto Loan APR, Interest and Fees

In brief

• The interest rate is the price of the money. The APR is meant to be the price of the loan, fees included. On a crypto loan nobody has ruled that the two must be reported the way a bank reports them, so ask what is in the number.
• A fixed origination fee costs more the shorter you borrow. On Arvexo's published terms a $50,000 loan costs 14.5% a year over six months and 12.75% a year over four years, from the same 12.5% rate.
• A lower rate with a higher fee can be the dearer loan. In the example below the two quotes cross at eight months.

A lender quotes you a rate. That rate is not what the loan costs. The gap between the two is made of fees, and how much that gap matters depends almost entirely on how long you borrow for.

This article works through both numbers on the same loan, at five different terms, so you can see where they separate.

Interest rate and APR are not the same thing

The interest rate is the price of the money. The annual percentage rate is meant to be the price of the loan.

Under US consumer credit rules, the annual percentage rate is "a measure of the cost of credit, expressed as a yearly rate" (12 CFR 1026.22). It is calculated from the finance charge, which is "the cost of consumer credit as a dollar amount" (12 CFR 1026.4) and which expressly includes "Points, loan fees, assumption fees, finder's fees, and similar charges".

In plain terms, as the Consumer Financial Protection Bureau puts it, "An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate" (CFPB). That CFPB page is written about mortgages, but the distinction is general: the rate is one input, the APR is supposed to be the total.

A caveat worth knowing. Those rules govern consumer credit in the United States, and no US authority has addressed whether they apply to crypto-backed loans. That is not a technicality. It means you should not assume the number a crypto lender labels "APR" was calculated the way a bank would have to calculate it. Ask what is included.

Arvexo's published terms

• Interest: 12.5% a year, accruing daily on the outstanding principal and billed monthly. The principal is repaid at maturity (how interest is calculated).
• Origination fee: 1% of the loan, deducted from the principal when the loan is paid out. A $50,000 loan pays out $49,500.
• Adding collateral: no fee (can I add collateral during my loan).
• Early repayment: allowed in part or in full at any time; the payoff quote shows any applicable early repayment fee before you confirm (can I repay my loan early).
• Liquidation: a last resort, and any liquidation fee is stated in your terms (how liquidation works).
• Minimum loan: $5,000. Rates in the calculator are indicative; your rate is confirmed in your final terms (minimum and maximum loan amounts).

The worked example

Illustrative throughout. A $50,000 loan at 12.5% a year with a 1% origination fee of $500. The loan size is chosen for clarity; the rate and fee are Arvexo's published figures.

Interest for a month is $50,000 × 12.5% ÷ 12, which is about $521. Because interest accrues daily, the amount billed varies slightly with the length of the month.

What the loan costs in total, interest plus fee, at each term:

• 6 months: $3,125 interest plus $500 fee is $3,625, which is 7.25% of the loan, or 14.50% a year.
• 12 months: $6,250 plus $500 is $6,750, which is 13.50% of the loan, or 13.50% a year.
• 24 months: $12,500 plus $500 is $13,000, which is 26.00% of the loan, or 13.00% a year.
• 36 months: $18,750 plus $500 is $19,250, which is 38.50% of the loan, or 12.83% a year.
• 48 months: $25,000 plus $500 is $25,500, which is 51.00% of the loan, or 12.75% a year.

Look at the last figure on each line. The headline rate is 12.5% at every term, but the all-in annual cost runs from 12.75% to 14.50%.

One refinement. Because the fee is deducted from the principal, the cash that reaches you is $49,500 while interest is charged on $50,000. Measured against the cash you actually hold, the twelve-month cost is 13.64% rather than 13.50%. A small difference, but it is the honest number.

Why the shortest loan is the most expensive

The interest scales with time. The fee does not. A $500 fee spread over four years is nothing much. The same $500 spread over six months is two extra percentage points a year.

• 6 months: headline 12.5%, all-in 14.50% a year. The fee adds 2.00 points.
• 12 months: headline 12.5%, all-in 13.50% a year. The fee adds 1.00 point.
• 24 months: headline 12.5%, all-in 13.00% a year. The fee adds 0.50 points.

This is the same arithmetic that makes short-term consumer lending look so expensive when expressed annually. The CFPB illustrates it with payday loans, where a 15% charge on a two-week loan "equates to an APR of almost 400 percent because of the very short term" (CFPB). A crypto loan is nothing like a payday loan in size, term or purpose, and the comparison is not about the numbers. It is about the mechanism: a flat fee on a short loan is a large annual cost, however small it looks on the invoice.

The practical consequence is counterintuitive. If you need money for three months, a low headline rate with a chunky origination fee may cost more than a higher rate with no fee. Work out the dollars before comparing the percentages.

Why the lower rate is not always the cheaper loan

This is where the arithmetic earns its keep. Two illustrative quotes on the same $50,000 loan. Lender A: 11% interest, 2% origination fee. Lender B: 12.5% interest, 1% origination fee. Lender A has the lower headline rate by a point and a half. Here is what each costs in total, interest plus fee.

• 3 months: Lender A $2,375, Lender B $2,063. B is cheaper.
• 6 months: A $3,750, B $3,625. B is cheaper.
• 8 months: A $4,667, B $4,667. Identical.
• 12 months: A $6,500, B $6,750. A is cheaper.
• 24 months: A $12,000, B $13,000. A is cheaper.
• 36 months: A $17,500, B $19,250. A is cheaper.

The two quotes cost exactly the same at eight months. Below that, the lender with the higher rate is cheaper, because the fee dominates. Above it, the lender with the lower rate is cheaper, because the interest dominates.

So "which lender is cheaper" has no answer until you say how long you are borrowing for. A three-month borrower who picks Lender A for the better rate pays 15% more than they needed to. A three-year borrower who picks Lender B pays 10% more.

Work out your own crossover before you compare anything. The fee difference divided by the rate difference gives you the term at which the two are equal: here, 1% of $50,000 divided by 1.5% of $50,000 a year, which is two thirds of a year.

The five numbers to ask for

The interest rate, and whether it is fixed for the term or can change.

The origination fee, as a percentage and as a dollar figure, and whether it is deducted from the amount you receive or added to what you repay. Arvexo deducts it: a $50,000 loan puts $49,500 in your account, and you pay interest on $50,000 while holding $49,500.

Any early repayment charge. If there is one, borrowing short is more expensive than the figures above suggest.

Any liquidation fee, charged if your collateral has to be sold.

Any charge for adding collateral. You will want to do this during a bad week, and a fee is a bad reason to hesitate. Arvexo charges none.

Add them up in dollars for the period you will actually borrow. That number, divided by the loan and by the number of years, is your real annual cost.

What changes the rate you are offered

The asset. More volatile collateral carries more risk for the lender and usually a different rate and a lower LTV ceiling.

Your starting LTV. Borrowing conservatively against more collateral is less risky to fund than borrowing at the maximum.

The term. Longer loans meet more market cycles.

The size. Larger facilities are often priced individually rather than off a rate card.

Market conditions. The cost of funding moves, and so does the rate available to new borrowers.

None of these is unique to crypto. What is unique is that the collateral can move 30% in a week, which is why the LTV you choose affects the price as much as the amount you borrow.

Interest is not the only cost

The figures above price the loan. They do not price the risk.

If your collateral falls far enough, it is sold, and that cost dwarfs any fee. Margin calls and liquidation works through how far each asset has to fall. And if you are weighing this against simply selling, borrow or sell runs both sets of numbers side by side.

Before you agree a rate

• Get the interest rate, the origination fee, and every other charge, in writing.
• Convert them into dollars for the period you will actually borrow.
• Divide by the loan and by the years to get your real annual cost.
• Check whether the fee is deducted from your proceeds or added to your repayment.
• Ask what an early repayment costs, before you need to know.
• Compare lenders on the total, not the headline.

See your estimated cost in the loan calculator.

Frequently asked questions

Is APR the same as the interest rate on a crypto loan?

No. The interest rate is the charge for the money. An APR, as defined in US consumer credit rules, also counts loan fees. Many crypto lenders use the term loosely, so ask whether the number includes the origination fee, and compare lenders on total dollars for your term.

How is interest calculated on an Arvexo loan?

Daily, on the outstanding principal, at the annual rate in your final terms, and billed monthly. A $50,000 loan at 12.5% accrues roughly $17.12 a day. Repaying part of the principal reduces the interest from the following day.

Is the origination fee taken out of the loan?

Yes. Arvexo's 1% fee is deducted from the principal at drawdown, so a $50,000 loan pays out $49,500 and interest is charged on $50,000.

Is there a fee for adding collateral or repaying early?

Adding collateral carries no fee. Early repayment, in part or in full, is allowed at any time; the payoff quote shows the outstanding principal, interest accrued to date and any applicable early repayment fee before you confirm.

Related reading

• Repaying a crypto-backed loan: what to check before you borrow
• How to compare crypto lenders: a borrower's checklist
• Margin calls and liquidation: what every borrower should know
• Borrow or sell? A better way to think about liquidity
• How crypto-backed loans work
• how interest is calculated

Sources

• Code of Federal Regulations, 12 CFR 1026.22, Determination of the annual percentage rate
• Code of Federal Regulations, 12 CFR 1026.4, Finance charge
• Consumer Financial Protection Bureau, What is the difference between a mortgage interest rate and an APR?
• Consumer Financial Protection Bureau, What is an annual percentage rate and why is it higher than the interest rate for my payday loan?
• Arvexo Help Center, How is interest calculated on my loan?

Collateral can fall in value and be sold. This article is for general informational purposes only and does not constitute financial, investment, legal, or tax advice.