Generally, the Annual Percentage Rate (APR) is an interest a borrower pays yearly, expressed as a percentage of the borrowed sum. For example, an APR of 10% for a $1000 loan entails an interest of $100 yearly. Accordingly, the borrower keeps paying this interest per year and at the end of the lending period, pays back $1000.

Similarly, APR in crypto refers to the percentage investors receive for lending their crypto. Notably, these investors make their assets available for lending on platforms and earn interest through APRs.

Noteworthy is that the interest rates (APRs) differ based on the particular crypto token, the amount involved and the lending platform. Consequently, centralized (CEXs) and decentralized exchanges (DEXs) engage in crypto lending.

Types of Crypto Loans in Exchanges

Usually, 2 loan systems exist on most lending platforms: flexible lending and flexible lending. Fixed lending secures a user’s crypto assets for a specified and often long period. In addition, a user availing his crypto for such loans earns more interest.

On the other hand, flexible lending offers a lower APR and the secured crypto assets can be withdrawn at the user’s will. As a result, most investors with a robust portfolio will opt for fixed lending to earn massive passive income.

In addition, investors who secure their assets for a long period for fixed lending are affected more by the volatility of cryptocurrencies. As their crypto assets are locked in the fixed lending program, they can’t be withdrawn despite any market trend.

Calculating Annual Percentage Rate (APR) in Crypto

In a nutshell, APRs are just simple interest for a principal sum borrowed or invested. Accordingly, it’s a percentage of the principal crypto set by the lending platform.

For instance, an APR of 7% for a 100 BTC loan is 7% of 100 which equals 7 BTC. By the end of 1 year (per annum), the borrower pays back 107 BTC (principal plus APR sum).

Meanwhile, some lending periods may not even be up to a year, just some months. For this case, the number of months is expressed as a decimal fraction of 12 months. This decimal is now multiplied by the APR to get the interest rate on the crypto for those months.

For instance, a loan of 100 ETH with an APR of 7% is taken for 6 months. 6 months as a fraction of 12 equals 0.5, multiplied by 7 equals 3.5%. The interest on 100 ETH at APR 7% for 6 months is 3.5% of 100: 3.5 ETH. Altogether, the borrower pays back 103.5 ETH.