Why can’t I get a 1% loan to earn 8.88% yield?

This is a question that comes up on everyone’s mind at some point in their Celsius crypto journey. Can’t I take out a loan with very low interest rates (APR) to earn reward yield that gives you higher rates (APY)?

It sounds like a great idea. Take out a loan at 1% APR in order to earn interest with the stablecoin proceeds earning 8.88% APY. However, if it’s too good to be true, it likely is… and it’s all in the details.

Let’s break it down using an example of 2,000 USDC (equivalent to $2,000 USD) over a 1 year time period. This also assumes that the reward rate remains at 8.88% APY through the year.

OptionUSDC
Balance
Loan
Proceeds
Reward
Interest
Loan
Interest
TOTAL
BALANCE
(USDC)
12,00018502,185
2A050046-52,041
2B50050093-34.752,058
2C1,000500139-44.752,094

As you can see in the above example, a Celsius user is better off keeping their original 2,000 USDC as USDC earning in-kind interest (versus taking out any loan to earn interest).

The main reason why taking out stablecoin loans against your stablecoins assets doesn’t work is because collateral used for the loans DO NOT earn reward interest. And with Loan-to-Value between 25% to 50%, you are essentially locking up between 2 to 4x the USDC (and not earning interest on that).

Of course, there are several great arguments about variables that may affect the returns. These include:

  • taking a loan and having the loan proceeds earn in-CEL
  • taking a loan and using the proceeds to purchase high interest-earning assets like SNX or MATIC
  • increase in stablecoin reward rates over time

However, we won’t go through those details in this write-up as these strategies are more complex.


Please see the calculations below for more details:

Option 1: Keep the 2,000 USDC earning in-kind at 8.88% APY

This is the simplest way to HODL and forget about it until 10 years down the road. If you have 2,000 USDC, your in-kind Celsius rewards will be approximately 185 USDC at the end of 1 year.

Option 2A: Take out a 500 USDC loan at 1% APR and 25% LTV

The Loan-to-Value (LTV) is 25% for all 1% APR loans. Therefore, you will need to put up 4x the collateral. This means that a 500 USDC loan will require 2,000 USDC as collateral, leaving you with 0 USDC in your Celsius wallet. Collateral used for loans DO NOT earn reward interest!

The 500 USDC proceeds can now earn 8.88% APY, giving you approximately 46 USDC at the end of 1 year. In addition, the total interest payable for the loan through 1 year is 5 USDC. The net amount is 41 USDC only. Not so good compared to Option 1.

Option 2B: Take out a 500 USDC loan at 6.95% APR and 33% LTV

The Loan-to-Value (LTV) is 33% for all 6.95% APR loans. Therefore, you need to put up 3x the collateral. This means that a 500 USDC loan requires ~1,500 USDC as collateral, leaving you with 500 USDC in your Celsius wallet plus the 500 USDC loan proceeds.

Therefore, you now have 1,000 USDC earning 8.88% APY. This gives you approximately 93 USDC at the end of 1 year. The total interest payable for the loan through 1 year is 34.75 USDC, leaving you with a net amount of 58.25 USDC only. Again, not as good as Option 1.

Option 2C: Take out a 500 USDC loan at 8.95% APR and 50% LTV

The Loan-to-Value (LTV) is 50% for all 8.95% APR loans. Therefore, you need to put up 2x the collateral. This means that a 500 USDC loan requires ~1,000 USDC as collateral, leaving you with 1,000 USDC in your Celsius wallet plus the 500 USDC loan proceeds.

Therefore, you now have 1,500 USDC earning 8.88% APY. This gives you approximately 139 USDC at the end of 1 year. The total interest payable for the loan through 1 year is 44.75 USDC, leaving you with a net amount of 94.25 USDC only. Again, not as good as Option 1.