What is loan health?
Definition: Loan Health is the current status or condition of your loan. It's an indicator of how safe the loan is from the risk of liquidation.
Factors Affecting Loan Health: This is determined by a few factors, primarily the value of the collateral deposited versus the amount of the loan taken out.
Healthy vs Unhealthy Loan: A "healthy" loan means that the value of the collateral is significantly higher than the loan amount, reducing the risk of liquidation. Conversely, an "unhealthy" loan is closer to triggering a liquidation, often due to a decrease in the value of the collateral or an increase in the loan amount.
You can keep track of your loan health from the Dashboard section within the app. From there you can also see the Total Credit Line which indicates the amount you’re eligible to borrow, based on the deposited collateral. Please refer to Axon App User Guide for full details on all options within the app.
What is Loan-To-Value (LTV) Ratio?
Definition: The Loan to Value Ratio is a metric used to assess the risk level of a loan. It's calculated by dividing the total loan amount by the total value of the collateral deposited.
Importance: The LTV ratio is crucial because it determines how much you can borrow against your collateral. Each asset in AAVE V2 has its own LTV ratio.
High vs Low LTV: A high LTV ratio implies that you are borrowing a large amount relative to your collateral, which can be riskier and bring you closer to liquidation thresholds. A lower LTV ratio indicates a safer margin but also means less borrowing power.
What is the Liquidation Threshold?
Definition: This threshold marks the point at which your loan is considered undercollateralized and subject to liquidation.
Example: If the liquidation threshold is 80%, and the value of your loan exceeds 80% of your collateral’s value, your position becomes vulnerable to liquidation.
Safety Mechanism: The difference between the LTV and the Liquidation Threshold acts as a buffer to protect borrowers.
What is the Health Factor?
Purpose: The Health Factor is a numeric representation of the safety of your deposited assets against borrowed assets.
Calculation: It's calculated using the total borrows, the value of your collateral, and the liquidation threshold for each asset.
Indicator of Risk: A higher Health Factor indicates a safer position. A Health Factor below 1 signals a high risk of liquidation